1. Who Lacks the Capacity to Contract?
2. Minors and the Capacity to Contract 
3. The Mentally Ill and the Capacity to Contract
4. Under the Influence of Drugs or Alcohol

"What does capacity to contract mean" is a common question that many people have when signing contracts. Capacity to contract refers to the legal competence of an individual to enter a contract.

Who Lacks the Capacity to Contract?

According to Section 11 of the Contract Act, an individual needs to meet certain guidelines to be deemed competent enough to enter into a valid contract. These guidelines are as follows:

  • The individual cannot be a minor.
  • The individual needs to be mentally sound.
  • The individual is not disqualified to enter valid contracts by law.

In terms of legally binding agreements, certain individuals will always lack the legal capacity or ability to enter contracts. Legally, it is assumed that these individuals do not know what they are truly doing. Legal minors and the mentally ill are generally not permitted to enter contracts. These individuals are placed into a "special" category.

Minors and the Capacity to Contract 

The concept of the capacity to contract protects individuals who lack capacity from having to commit to agreements that abuse their lack of knowledge or savvy.

If a legal minor or a mentally ill person enters a contract, the agreement is voidable. This means that the person who lacks legal competence to enter a contract is able to void the agreement at any time. However, the person also has the option to permit the agreement to go ahead as planned.

In most states, minors are considered individuals who are under the age of 18. These individuals lack the capacity to contract. Therefore, if a minor signs a contract, he can opt to either void the contract or honor the agreement. However, there are a few exceptions. In most states, for example, minors are not able to void contracts for food, lodging, clothing, and other necessities.

Minors can only void contracts due to a lack of capacity to contract only while under the age of 18. In many states, if a minor turns 18 and hasn't voided a contract, it is no longer possible for the contract to be nullified. For example, if a minor signs a three-year endorsement agreement with a brand, he will be able to void the contract as long as he is under age 18. 

The Mentally Ill and the Capacity to Contract

If an individual lacks sufficient mental capacity, he or she can void most contracts. The mentally ill can also have guardians void contracts. One exception to this rule is that contracts for necessities cannot be voided.

In most states, mental capacity is determined by whether the party is able to understand the meaning and the effects of the words making up the transaction or contract. This test is referred to as the "cognitive" test. 

In some states, the "affective" test is used. If a party does not have the ability to act in a manner that is reasonable, the contract can be voided by said party. However, according to the test, the other party must have reason to know about the mentally ill party's condition.

Some states use the "motivational" test as a third measure. In these states, courts measure capacity in terms of the ability of a person to judge whether it would be beneficial to enter into the agreement. If the tests are applied to individuals who have mental conditions like bipolar disorder, the tests may produce different results. 

For example, if an individual who has been diagnosed as manic-depressive signs a contract, he may be considered mentally capable of signing the contract. Though the individual may have signed the contract while in a manic state, he may still be deemed capable of contracting because the illness may not have rendered him mentally incompetent. In the eyes of the Court, the manic state was cognitive in the sense that the condition may have impaired the judgment of the individual but not his ability to understand.

Under the Influence of Drugs or Alcohol

In general, individuals who are under the influence of drugs or alcohol do not have the capacity to contract. According to the courts, individuals who are intoxicated voluntarily should not be permitted to avoid contractual obligations. Instead, these individuals should assume responsibility for any of the actions they commit in their altered, self-induced state of mind.

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