Lesson 7: Capacity to Contract
Welcome to Lesson 7 of our instructable on Contract Formation. In this lesson, we will explore the concept of Capacity to Contract, which is a fundamental element required for creating a legally binding agreement. If you're looking for an in-depth guide on contract law, consider checking out Contracts: Examples & Explanations.
Definition of Capacity to Contract
Capacity to contract refers to the legal ability of a person or entity to enter into a binding contract. Individuals or entities lacking this capacity cannot be legally bound by the terms of the contract.
Key Elements
- Age of Majority
- Mental Competency
- Legal Authority
Age of Majority
Typically, a person must be of the age of majority, which is usually 18 years old, to have the capacity to contract. Contracts entered into by minors are generally voidable at the minor's discretion.
Mental Competency
For a contract to be valid, both parties must have the mental capacity to understand the terms and the nature of the contract. Individuals with mental impairments or who are under the influence of substances may lack this capacity.
Mental Competency Example
John, who suffers from severe dementia, signed a contract to sell his house. Due to his condition, John lacked the mental capacity to understand the contract's terms.
Legal Authority
Entities such as corporations and organizations must have the legal authority to enter into contracts. This authority is usually granted to specific individuals within the entity, such as officers or directors.
Legal Authority Example
The CEO of Company X signed an agreement without the board's approval. Since the CEO lacked the legal authority, the contract was deemed invalid.
Diagram: Capacity to Contract
Summary
To summarize, capacity to contract is an essential requirement for a valid contract. It ensures that all parties involved are legally able to understand and agree to the contract's terms. Understanding this concept is crucial for avoiding agreements that could be deemed unenforceable.
For more insights on contract formation, be sure to check out our lessons on Definition and Purpose of a Contract and Intention to Create Legal Relations.