8.1 General Perspectives on Capacity

Contractual capacity refers to the legal ability of an individual or entity to enter into a binding contract and be held legally responsible for their actions and obligations under that contract. It is an important principle in contract law as it ensures that contracts are entered into voluntarily and that all parties involved are capable of understanding and fulfilling their contractual obligations. Capacity is necessary for a legally binding contract.

Most people who enter contracts have capacity. Because of that, and to avoid having to prove one’s capacity every single time they wish to enter a contract, capacity is presumed unless there is something about the person or the transaction that calls capacity into question. In instances where capacity is questioned, it is possible to have either limited capacity (also called limited competency), or be incapable of contracting at all due to a lack of capacity, or incompetency.

The rule of contractual capacity is important because it helps to protect individuals who may be vulnerable or not fully capable of making informed decisions. Minors, people with mental disabilities, and individuals who are under the influence of drugs or alcohol may not have the capacity to fully understand the terms of a contract or the consequences of entering into it. By requiring that parties have the legal capacity to enter into a contract, the law seeks to prevent unfair contracts where one party may take advantage of the other party’s lack of understanding of the legal consequences of an agreement. Further, requiring capacity to enter a contract helps to ensure that the terms of the contract are understood and agreed upon by both parties. Since a contract is a meeting of the minds, if someone lacks mental capacity to understand what they are agreeing to, it is unreasonable to hold that person to the consequences of the contract. At common law there are various classes of people who are presumed to lack the requisite capacity to fully understand the consequences of a contract. These include infants (minors), the mentally ill, and the intoxicated. This Chapter will review each of these in turn.