The Requirements of a Valid and Enforceable Contract, Part 4—Contractual Capacity

What Is Contractual Capacity? When Might a Person Lack Capacity?

In this series of blogs, we have looked in greater detail at the specific requirements of a valid and enforceable contract. The first three blogs in the series looked at agreement, consideration, and volition. In this article, we examine the mandatory component of contractual capacity.

What Is Contractual Capacity?

As a general rule, courts will not enforce agreements that parties entered into unwillingly, accidentally, or without knowledge of the rights and responsibilities set forth in the agreement or of its potential consequences. That’s the essence of the requirement of contractual capacity. It mandates that parties knowingly enter agreements with a basic level of competence and understanding. Specifically, contractual capacity involves a full understanding of:

• The terms and conditions of the contract
• The rights and responsibilities conferred on both parties by signing the agreement

It also signals that both parties have the ability to comply with the terms of the agreement.

What Are Typical Situations Where a Party May Lack Contractual Capacity?

There are three situations where a person may lack the necessary capacity to enter into a binding and enforceable agreement:

• Mental Deficiency— A person may lack the mental competence to understand a contract either due to a lack of necessary intelligence or due to mental illness.
• Intoxication— A contract may not be valid if signed by a party while they are intoxicated or under the influence of drugs.
• Minors— A party under the age of legal adulthood lacks the capacity to enter a binding contract.

What Is the Potential Impact on the Contract If a Party Lacks Capacity?

When the evidence proves that one of the parties lacked the necessary capacity to enter the agreement, the contract may be either void or voidable. A void contract will have no legal validity and cannot be enforced by either party. A voidable contract, however, may be enforced or invalidated by one of the parties (typically the party who lacked capacity).

For example, when a minor signs a contract, it is typically “voidable” by the minor (usually while the minor is still underage and for a reasonable period of time after the minor becomes an adult). That means that the minor—but only the minor—may choose to enforce or void the contract. The adult will be bound by the terms of the agreement, unless the minor voids the contract.

Contact MCIS Law

At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses and business owners throughout southeast Texas, handling all matters related to business formation. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.