Competency and Capacity in a Contract

Contractual capacity when forming a contract is often referred to as either “competency” or “capacity.” When it comes to entering into a legally binding contract, certain people may be considered to lack the capacity or competency to contract. In short, both parties to a contract must have contractual capacity or competency in order for the agreement to be legally binding.

Contractual capacity means that the parties are able to understand that a contract is being formed. Further, the parties must also be able to understand the basic nature of the contract. In short, when a party does not understand the nature and consequences of an agreement that they have entered, the law treats that party as lacking the capacity to form a legally binding contract.

It is important to note that contractual competency and capacity have nothing to do with a person’s skill in bargaining or negotiating a contract. Thus, just because a person does not understand every detail and provision in a contract does not mean that they lack the competence or capacity to form the contract.

In short, it is enough if the person understands that they are entering into a contract, and that they understand the general nature of the contract. For example, most people that enter into a phone plan contract have no ability to negotiate and surely do not understand (or even read) every detail and provision in the contract; however, they are still entering into a binding contract, as they do understand that they are entering a contract in order to have a phone plan.

When Does a Person Lack Contractual Capacity?

In general, a person who enters a contract presumably possesses complete legal capacity to be held liable for the duties they agree to undertake, unless that person is a minor, mentally incapacitated, or intoxicated.

A minor is defined in most states as a person under the age of 18. The law presumes that minors are too immature, inexperienced, and lack the legal capacity to make a contract. Thus, courts allow any contract made by a minor to be voidable at the minor’s discretion in order to protect them from being held accountable for entering into unwise contracts.

In other words, although you can enter into an enforceable contract with a minor, they may disavow the contract at any time, with only a few limited exceptions. Exceptions to a minor being able to void a contract include the following:

• Minor Comes of Age: In most states, if a minor comes of age and are now considered an adult, and they have not done anything to void the contract, then the contract can no longer be voided due to their previous incapacity as a minor; or
• Contracts for Necessities: Most states do not allow a minor to avoid a contract for necessities such as food, clothing, and lodging.

Further, persons who are mentally incapacitated or intoxicated are generally deemed to lack contractual capacity. Similar to contracts with minors, contracts entered into by persons who are intoxicated are also voidable at the intoxicated person’s discretion, but only if the other party knew or had reason to know the degree of impairment.

However, courts rarely show sympathy for people who try to void their contractual duties on grounds that they were intoxicated; as a practical matter, courts only void contracts upon a showing of evidence that demonstrates the sober party was taking clear advantage of the intoxicated person.

The above is not true for people who are mentally incapacitated due to prescription medication, they are generally treated the same as people who are mentally incompetent or insane. Therefore, people incapacitated due to prescription medication are generally relieved from their contractual responsibilities.

Likewise, contracts entered into with mentally incapacitated people are voidable at that person’s discretion. However, a mentally incapacitated person’s guardian or personal representative may ratify a contract as the legal representative for the mentally incapacitated person, and thereby convert the agreement into a legally binding contract.

Courts will usually evaluate a person’s competency to form a contract at the time of contract formation rather than an earlier or later time frame.

What Happens to Contracts If One Person Lacks Capacity?

As noted above, if a contract has been entered into, but it is later discovered that one of the parties lacks contractual capacity, the contract is usually voidable. However, that party is not automatically relieved from any contractual duties that they may have incurred. The court may need to do additional analysis to determine whether they still need to fulfill any duties stated in the contract.

Further, a party to a contract will not be relieved from their contractual duties until the court has completely adjudicated the issue. This means that a court will first consider all evidence concerning the party’s mental capacity and make a determination from that evidence before relieving them from their contractual duties, unless there is an existing court order declaring the party to be incompetent or insane.

Should I Hire an Attorney for a Dispute Involving Contractual Capacity?

Although not a requirement to contract, it is often advisable that you consult with a lawyer before you enter into any contract. An experienced and well qualified contract lawyer will be able to consult you and inform you if there will be any issues regarding competency and capacity of any party entering into the contractual agreement.

Further, if you are facing an issue in an existing contract that may be voidable due to one party’s capacity, you should immediately seek the assistance of a qualified contract lawyer.