Knowing what does capacity mean in a contract is important when you are entering into a legal contract. Having the capacity to contract means the person entering into the contract has a legal competence. This means they are competent to perform the act they're agreeing to in the contract. A person must have a sound mind to get in this situation.

Capacity to Contract Law and Legal Definition

However, some people aren't able to enter into a contract, as they're not capable. This includes the following:

  • Those who are insane
  • Minors or infants
  • Those who are under the influence of drugs
  • Persons who are bankrupt
  • An enemy alien

What is the Capacity to Enter into Contracts?

Most people assume that they can enter into a contract. People who are minors, intoxicated, or mentally ill have several options to choose from after they enter into a contract. They can decide to disaffirm the contract, which is their desire to not be bound by the contract anymore. This is done actively or verbally. The other action they can take is ratification, which shows their willingness to be bound by the contract's terms. This can also be active or verbal. Ratification will win over disaffirmation.

If someone tries to disaffirm a contract which they already had a substantial benefit from, the courts won't let them disaffirm this contract. Since they already benefited from the contract, the court considers this proof of acceptance, and they're bound to the contract.

Minors Have No Capacity to Contract

In most states, minors are those who are under 18 years old. They don't have the capacity to make a contract, and if one signs a contract, they can either void the contract or honor the deal. There are some exceptions to this, however. Most states don't let a minor void a contract for clothing, lodging, good, and other necessities. A minor can also decide to void a contract only while they're under the age of majority. Once they turn 18 years old and have taken no steps to void the contract, it is not voidable.

For example, if Sean is 17 years old and signs an endorsement agreement for snowboarding gear, he's agreed to endorse their products and in turn, cashes his earnings for a few years from this deal. When he turns 19 years old, he can't get out of the agreement to sign a better endorsement deal. Saying he lacked capacity when he was 17 years old and signed it is not enough to let the agreement be voided.

Mental Incapacity

A person who doesn't have a capable mental capacity can void or have their guardian void a contract unless it's for necessities. Most states use a standard they follow to test mental capacity that sees whether the person understands the meaning and effect of all words that make up the transaction or contract. This happens using a cognitive test, while some states use the affective test or the motivational test. Courts will measure the person's mental ability to decide if they knew what they were doing when they entered into the contract.

As an example, Mr. Smalley obligated himself to sell a product but claimed later that he lacked capacity, so the contract obligating him to sell was void. He had been in mental hospitals several times and diagnosed as manic-depressive by doctors. His doctor claimed he wasn't capable of agreeing to business deals in his manic state. The California Court of Appeals wouldn't end the contract and claimed that Smalley could contract in his manic state.

The manic portion of the illness isn't a weakness of mind that makes someone incompetent to enter into a contract according to the court. They claimed it might impair his judgment but not impair his understanding, therefore the contract was not void.

Alcohol and Drugs

Those who are under the influence of alcohol or drugs don't have the capacity to contract. If anyone is voluntarily intoxicated, the courts do not think they should avoid any contractual obligations. They need to take responsibility for putting themselves in that state of mind.

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