Key Takeaways

  • The capacity of parties refers to the legal competence of individuals or entities to enter into contracts.
  • Minors, persons of unsound mind, and certain entities like bankrupt individuals often lack legal capacity.
  • Contracts with minors are generally void, but exceptions exist for necessities.
  • Corporations have legal capacity but must act through authorized agents.
  • New categories include intoxicated individuals and disqualified professions.
  • Examples illustrate how capacity affects enforceability in real-world scenarios.An example of capacity of parties is the ability of a minor to enter a legally binding contract. In most jurisdictions, an agreement cannot be upheld by the court if the person involved is underage, not of sound mind, or is not otherwise disqualified by law. A minor is anyone who has not yet turned 18.

Rules About the Capacity of Minors

  • Any contract made with a minor is automatically and immediately void.
  • If the minor in question has misrepresented his or her age, he or she is not subject to estoppel. This means that the underaged individual avoids contract liability by admitting his or her actual age at the time of signing the contract. For example, if a 17-year-old successfully opens a credit card and fails to pay the balance due, the credit card company will not be able to make recovery since the person was a minor when the credit card agreement was signed.
  • Restitution cannot be sought against a minor for contract breach even in cases of fraud or misrepresentation. However, he or she can be asked to restore money or property that can be located. For example, if a minor buys a car after lying about his or her age and fails to make payments, he or she is not personally liable but the car can be repossessed.
  • A minor can bind the other party to a contract and claim the benefits therein.
  • If a minor enters a promise before turning 18, he or she cannot ratify or confirm this promise after turning 18. However, he or she can make a new promise provided that it includes new consideration. For example, if a teenager borrows $10,000 and pays it back, he or she may be able to enter a new contract for an additional loan after attaining the age of majority, with the new promissory note serving as fresh consideration.
  • Minors are held liable for causing property damage or personal injury through their negligence. This concept is known as tort or civil wrong. For example, if a minor borrows a person's car and crashes it, he or she is responsible for the ensuing damages.
  • If a minor enters jointly into a contract with a person who is of the age of majority, the agreement can be enforced against the latter party but not against the former.
  • In a breach of contract the court often orders specific performance, which means the party in breach is forced to uphold the contract terms. Since an agreement with a minor is void, he or she cannot be ordered to perform the contract if it is breached.
  • A minor cannot be a partner in a partnership but can share in its profits with the approval of all other partners. He or she cannot be held responsible for business losses, however.
  • Shares of a company can be transferred to a minor if the articles of the company allow this. However, he or she cannot become a full member.

Persons of Unsound Mind

For a valid contract, both parties must be of sound mind. An individual may be considered not of sound mind if he or she does not have the cognitive or decision-making capacity to understand the terms of the contract, whether because of mental illness, developmental delays, or a related issue. A person who has signed a contract under the influence of drugs or alcohol is considered temporarily of unsound mind, and thus the resulting contract is void.

Intoxicated Individuals

Individuals who are intoxicated at the time of entering into a contract may lack the capacity to understand its nature and consequences. If a person was so intoxicated that they could not comprehend the terms and the other party knew or should have known of this impairment, the contract may be voidable. However, courts often require substantial proof of incapacity due to intoxication.Example: If someone signs a car purchase agreement while heavily intoxicated and lacks understanding of the contract, it may be voidable if the seller was aware of their condition.

Corporations

Because a corporation is considered a separate legal entity, it has the capacity to enter contracts just as an individual does. Contracts with a corporation are valid whether they are oral or written provided that the subject matter is appropriate for an oral contract. For example, real estate contracts must be written.

Authorized Agents and Ultra Vires Acts

A corporation acts through its agents, typically officers or authorized employees. A contract is only enforceable if the person signing had actual or apparent authority. If a contract falls outside the corporation's authorized activities (an ultra vires act), it may be deemed unenforceable.Example: A nonprofit organization dedicated to education cannot legally enter into a contract to run a for-profit nightclub unless permitted by its charter.

Other Situations

Depending on the jurisdiction, others who may be judged incapable of entering a contract include individuals who are bankrupt and/or insolvent, who are from another country, or who are currently in prison. Everyone else can enter a contract if they are of legal age, of sound mind, and are not disqualified from doing so for a legal reason.

Real-World Examples of Capacity

To further illustrate capacity of parties with example, consider the following scenarios:

  • Minor Borrowing Money: A 17-year-old takes out a loan and later refuses repayment. Since they are a minor, the lender generally cannot enforce the contract.
  • Mentally Incompetent Party: An individual diagnosed with schizophrenia signs a property lease during an episode. If the condition affected their judgment and was known to the landlord, the lease could be voided.
  • Corporate Contract Breach: A sales director signs a contract without board approval. If the director lacked authority, the company might not be held liable.
  • Intoxicated Agreement: A person under the influence at a bar agrees to sell a car. The agreement might be rescinded if sobriety and awareness cannot be proven.

Disqualified Professions and Legal Disabilities

Certain individuals may be restricted from contracting due to professional regulations or legal disability. This includes people disqualified by law (e.g., convicts under specific sentences) or professions requiring special permissions. For instance, individuals disbarred from legal practice cannot enter into contracts to provide legal services.Example: An accountant whose license is revoked cannot enter into a valid contract to offer certified auditing services.

Frequently Asked Questions

1. What is meant by "capacity of parties" in contract law? It refers to the legal ability of a party to enter into a binding contract, typically requiring age of majority, sound mind, and absence of legal disqualifications.

2. Can a minor enforce a contract against an adult? Yes, a minor can choose to enforce a contract against an adult, but the reverse is not true unless the contract involves necessities.

3. What happens if a contract is made with someone of unsound mind? Such contracts are generally voidable if the person could not understand the agreement and this was known to the other party.

4. Are contracts made by intoxicated individuals valid? They can be voidable if the individual lacked understanding and the other party was aware or took advantage of the condition.

5. Do corporations always have capacity to contract? Yes, but only through authorized agents acting within the scope of their authority and within the bounds of the corporation’s legal powers.

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