Capacity to Contract

Contracts must meet a number of requirements to be enforceable. One important rule is that a party to a contract must have the legal competence or legal ability (i.e., capacity) to enter into a contract. There are a variety of ways in which a party can be determined to lack capacity.

Sometimes the issue of capacity involves mental impairment or a mental deficit. It only makes sense that the law would not enforce a contract entered into by an insane person or someone suffering from severe mental illness. In some cases, this is an easy question to resolve. For example, in some cases a person’s mental impairment has been determined by a court and a guardian has been appointed. In other cases, however, the line might not be so clear. Maybe a person has a very low IQ, or suffers from a treatable mental illness. Is this enough to be determined incompetent? State laws vary on how courts will determine if a person had the capacity to enter into a contract.

A person can also lack capacity to enter into a contract based upon age. Generally, when a minor signs a contract, it is voidable at the election of the minor. A common exception is that minors often are not permitted to void contracts for the provision of “necessaries” (basically, items needed to survive).  

Capacity can also come into question in agency and business situations, when one person signs an agreement on behalf of another person or business entity.