Contract Capacity: Everything You Need to Know
Contract capacity is the ability of a qualified entity to enter into a valid, formal, legally binding agreement with another entity and the ability to satisfy the terms and conditions of such an agreement.3 min read updated on January 01, 2024
Contract capacity is the ability of a qualified entity to enter into a valid, formal, legally binding agreement with another entity and the ability to satisfy the terms and conditions of such an agreement.
Lack of Contract Capacity
Some classes of people don't have contract capacity. Examples of such people include the following:
- The mentally challenged
- People under the influence of narcotics and other intoxicating substances
- Imprisoned convicts
While it's true that some people lack sufficient mental ability to sign contracts, there are also cases where people with sufficient mental ability may not be qualified to sign contracts. The law points out people who can't sign contracts and keeps other entities from signing contracts with them.
People Who Are Not Qualified to Sign Contracts
People who are not qualified to sign contracts are those deemed. mentally incapable. Such people lack the basic mental ability to understand the terms of the contract and, as a result, are not capable of satisfying its requirements. The law acknowledges three groups of people in this category who are not mentally qualified to be legally bound by a contract:
- The mentally ill or mentally underdeveloped: Such people lack the intelligence to socially function properly.
- Intoxicated persons: These are people who have abused, excessively ingested, or taken narcotics and other harmful substances to the point of diminishing their mental functions. Such substances include alcohol, illegal drugs, and prescription drugs.
- Minors: These are young people below the legal age of 18. Generally, people under 18 aren't qualified to sign a contract. However, there are significant exceptions to the general rule disqualifying minors from signing contracts.
Minors are permitted to go into contracts that allow them to buy necessities like clothing, food, and accommodation. Furthermore, certain states permit minors to own credit and bank accounts. The minors, in such cases, are responsible for their accounts if they signed a legally binding contract that states so. There are some exceptions to that rule as well.
For instance, in most states, minors can't cancel a contract for needs like clothing, food, and accommodation. In a majority of the states, if a minor hasn't canceled a contract before they turn 18, then it can no longer be canceled.
Understanding When a Contract Is Cancelable
Except for minors, an entity that offers evidence of not being fit to enter into or maintain an existing contract isn't automatically stripped of their contract responsibility. Usually, the court will carefully consider all of the circumstances under which the contract was undertaken. For instance, the contract is cancelable if one party was under the influence of an intoxicating substance at the time of its signing.
The intoxicated person may later cancel the contract, especially if the other person took advantage of their intoxication. Generally, courts rule that parties who seek to avoid their contractual responsibility by voluntary intoxication are not allowed to avoid it. Such persons are even charged with the added responsibility of taking care of every negative result of their intentional intoxication.
Guardians for Individuals With Mental Disability
Some adults with mental disabilities are able to live independently, earning a living with some effort. Whether such persons are qualified to enter into a contract or not is seriously and carefully considered on an individual basis by courts. However, for some people who are clearly unable to function properly on their own, a guardian is allowed to make legal choices for them and sign contracts on their behalf.
Test for Contract Capacity
In a majority of the states, the standard for testing the mental capacity of a party undertaking a contract is how well they understand the terms of the contract and their consequences. This is known as the “cognitive test.” Some states use what's known as the “effective test” instead. Some other states use a test called the “motivational test.”
The courts assess the person's contract capacity by their ability to decide whether or not the contract is a good fit for them. The tests might produce different outcomes when applied to mentally challenged people with problems like bipolar disorder.
Knowing whether or not there's adequate contract capacity in order to proceed with the signing of a contract can be achieved with the help of an experienced lawyer.
If you need help with a contract capacity issue, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.