Lack of capacity means that you cannot legally agree to contracts because of a permanent condition that affects your ability to make decisions.

The Meaning of Lack of Capacity

Contracts can be voided if one of the parties does not have the legal capacity to agree to enter a contract. Lack of capacity is defined in Section 2 of the Mental Capacity Act 2005. This section states that people lack the capacity if a mental impairment prevents them from making decisions.

Lack of capacity can apply to both the short and long term. A short-term lack of capacity can occur because of a temporary mental health condition or a medication you are taking that interferes with mental functioning. Lack of capacity can also be permanent and often results from serious conditions, such as the following:

  • Dementia.
  • Brain injuries.
  • Learning disabilities.

Both minors and people with mental impairments do not possess the legal capacity to be a party to contracts.

Who Lacks Legal Capacity?

Some people will always be considered to lack legal capacity, meaning they cannot enter into agreements that are legally binding. From a legal standpoint, anyone who is not aware of what they are agreeing to lacks legal capacity.

The mentally ill, for instance, cannot be legally capable of entering into a contract. Legal minors also fall into this category. If any person that lacks capacity enters a contract, the contract is voidable by that person. A voidable contract is one that can either be allowed to continue as intended or can be terminated. This right is granted to those that lack the capacity to protect themselves from being taken advantage of by bad actors.

Minors and Legal Capacity

People under the age of eighteen do not have the capacity to make a contract. If a minor agrees to a contract, they can either uphold the agreement or request that the contract be voided. However, there are certain exceptions to this rule. Contracts for necessities, including food and lodging, cannot be voided by a minor in some states. When a minor enters a contract and fails to void the contract before they turn eighteen, they will lose the right to void in most states.

For example, if a seventeen-year-old athlete signs an endorsement deal and then seeks to void that deal once they turn eighteen due to lack of capacity, the court usually won't allow the agreement to be voided. It's important to understand that while the party that lacks capacity can void a contract, the contract can be enforced against the other party if they are deemed legally capacity.

Sticking with sports, let's imagine that a professional sports team signs a minor athlete to a multi-year contract worth millions of dollars. The athlete, because he or she is a minor and lacks capacity, can void the contract before his or her eighteenth birthday to avoid playing for the sports team. However, the contract can still be enforced against the team if the player wishes.

You also need to understand the difference between a void contract and a voidable contract. Void contracts are contracts that are completely meaningless from the start, meaning there is no way that they could be enforced. On the other hand, a voidable contract is a contract that is valid and can either be terminated or upheld. Contracts involving minors are valid if the minor chooses to allow the contract to be enforced.

Mental Capacity and Contracts

Mentally incapacitated persons that enter contracts can either void those contracts themselves or have the contracts voided by a guardian. This rule excludes contracts for necessities. Most states use something called a cognitive test to determine mental capacity. If the party in question understands the words in the contract and the effect that entering the contract would have, they are considered mentally capable.

In certain states, the affective test is used instead of the cognitive test. With the affective test, if one party is incapable of acting reasonable and the other party understands this, then the contract is voidable.

There is a third test used in some states called the motivational test. The motivational test is used to gauge a person's ability to judge the pros and cons of entering a contract. Using this test can be very difficult when the person involved has a mental condition such as bipolar disorder.

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