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Certain people lack the legal ability to enter into a binding contract.In order for a contract to be legally binding, all of the individuals who signed the agreement must have "contractual capacity." Contractual capacity is a legal term that refers to the minimum mental capacity required to enter into an agreement. In other words, individuals who lack the capacity to contract are presumed to not know what they're doing, and they can "void," or set aside, the contract. The law recognizes three categories of individuals who lack the capacity to contract: minors, individuals with psychological disabilities, and intoxicated persons. If anyone from these categories enters into a contract, the agreement might be considered "voidable" by them. This protects the party who lacks capacity from being forced to go through with a deal that takes advantage of his or her lack of savvy. Let's look at some situations in which a person might lack the legal capacity to enter into a legally binding contract. Can a Minor Sign a Contract?Minors (those under the age of 18, in most states) lack the capacity to make a contract. So a minor who signs a contract can either honor the deal or void the contract. There are a few exceptions, however. For example, in most states, a minor cannot void a contract for necessities like food, clothing, and lodging. Also, a minor can void a contract for lack of capacity only while still under the age of majority. In most states, if a minor turns 18 and hasn't done anything to void the contract, then the contract can no longer be voided. Disaffirmance by a MinorA minor can "disaffirm," or set aside, a contract by stating their intention to not honor the contract. The minor can state this intention verbally (in words or in writing) or through actions that indicate the minor does not intend to honor the contract. For example, if a child entered into an agreement to mow his neighbor's lawn, and then the child sells his lawnmower, that action indicates his intention to disaffirm the contract. However, the disaffirmation must happen before the minor comes of age, and the minor can't pick and choose which parts of the contract to set aside. Further, if the minor paid provided consideration, such as money to the other party, the other party must give the consideration back to the minor following disaffirmation. Mental Incapacity and ContractsA person who lacks mental capacity can void, or have a guardian void, most contracts (except contracts for necessities). As with contracts with minors, the contract is voidable, and not automatically void. In other words, the person who lacked the capacity to enter the contract can either end the contract or permit it to go ahead as agreed on. In most states, the standard for mental capacity is whether the party understood the meaning and effect of the words comprising the contract or transaction. This is called the "cognitive" test. Some states use what's called the "affective" test: a contract can be voided if one party is unable to act in a reasonable manner and the other party has reason to know of the condition. And some states use a third measure, called the "motivational" test. Courts in these states measure capacity by the person's ability to judge whether or not to enter into the agreement. These tests may produce varying results when applied to mental conditions such as bipolar disorder. Can an Intoxicated Person Sign a Contract?People who are intoxicated by drugs or alcohol are usually not considered to lack the capacity to contract. Courts generally rule that those who are voluntarily intoxicated shouldn't be allowed to avoid their contractual obligations, but should instead have to take responsibility for the results of their self-induced altered state of mind. However, if a party is so far gone as to be unable to understand even the nature and consequences of the agreement, and the other (sober) party takes advantage of the person's condition, then the contract may be voidable by the inebriated party. The law requires that a party to a contract has capacity to enter a contract. This means that the person is recognised in law as being able to commit to a contract. Most people and companies have capacity and so in the vast majority of contracts this is not a problem. In the following circumstances, capacity to contract may be an issue:
People who have a mental impairmentGenerally speaking, people are free to enter into contracts even though they may have a mental impairment, or be temporarily disabled by drugs or alcohol. They are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The question of capacity to make the contract often arises only after the contract is in place. People with intellectual disabilitiesPeople with disabilities and their advocates will find some protection in the rule that a contract is not valid and enforceable unless there was genuine consent to its making. This is discussed further under the headings of undue influence and unconscionability. Capacity to give consent involves a general understanding of the nature of the contract (not necessarily its fine details). A person with a mental impairment, for example, may have the capacity to understand some contracts (for example, buying a loaf of bread), but not to understand other, more complicated contracts (for example, buying a car on credit). The law recognises that people with impaired capacity nevertheless must be able to purchase the necessities of life, for example, food, clothing, accommodation, medical services and so forth. The Sale of Goods Act 1896 (Tas), Section 7(1) provides that a reasonable price must be paid for necessary goods sold to someone with a disability. What are ‘necessaries’ and the rules applicable here are dealt with under the heading titled Young People (because the definition is the same for both groups). Where a person with a disability did not understand the general nature of the contract, a court can intervene to set aside the contract only if:
Generally, to escape the consequences of a contract, the other party should be notified of the intention not to be bound by the contract within a reasonable time. If the contract was made during a period when the person was able to understand it (legally termed a lucid interval), the contract will be binding even though the other party knew of the disability. Some people with disabilities (temporary or long term) are assisted by a manager appointed under the Guardianship and Administration Act 1995 (Tas). People with disabilities who have a manager appointed to act on their behalf are generally not free to enter into contracts, unless this is approved in writing by their manager or by an order of the Guardianship Stream of the Tasmanian Civil and Administrative Tribunal (TASCAT). Young peopleThe term young person is used here to refer to anyone under the age of 18 years in accordance with Section 3 of the Age of Majority Act 1973 (Tas). Sometimes, legal writing refers to ‘minors’ or ‘infants’, although the latter is now unusual. The exact capacity of young people to bind themselves and be bound by contract is limited but it is also not clear, because no legislation completely covers this area of law. If you, or a young person you know, has been bound to a contract you believe is unfair you should seek legal advice. BankruptsBankrupt people are not deprived of their general capacity to contract. However, there are provisions of the Bankruptcy Act 1966 (Cth) that relate to dealings and contracts by bankrupts. For example, obtaining credit of more than $5,881 (indexed under Section 304A) or more without disclosing your bankruptcy is an offence and liable to penalty under Section 269. Many of the amounts related to bankruptcy are indexed. The Australian Financial Services Authority maintains a list of the newly indexed amounts which can be viewed here. CorporationsA corporation is an artificial body created by law. The corporation has a legal existence separate from the individual people who comprise it. However, a corporation or company has the legal capacity of a natural person and therefore has the capacity to enter contractual relations as per Section 124 of the Corporations Act 2001 (Cth). This is so even if there is an express provision contained in the company’s constitution which limits the company’s powers. Transactions are not deemed void and beyond the company’s powers simply because the exercise of such powers is in breach of the restrictions placed in the company’s constitution as stated by Section 125(1). A company has capacity to enter into contracts but such contracts are only binding on the company if those acting on behalf of the company do so with the company’s express or implied authority (Section 126(1)). The courts have been quite liberal in their interpretation of implied authority. A company has to deal with the outside world through its people. The Corporations Act provide that anyone dealing with a company is entitled to assume that the person they are dealing with has authority to act for the company. The exception is if the outsider knows, or has reason to know, that the company representative lacked authority. It is therefore difficult for a company to deny that a person, apparently acting for the company, lacked authority and could not bind the company. If you are involved in a dispute which engages with this area of law you should seek legal advice. PrisonersDuring their imprisonment, prisoners may enter contracts, including contracts to buy and sell property. The usual restrictions about supervision and censorship of anything coming into the prison still apply, so that the permission of prison authorities is required before a prisoner may sign for, deliver or receive any document. Page last updated 27/02/2022 What is impairment of mental capacity?Section 2 of the Mental Capacity Act 2005 says that “a person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain.”
Under what circumstances a person is said to have a capacity to enter a contract?Any person who is not of the age of majority is a minor. In India, 18 years is the age of majority. Below the age of 18 years does not have the capacity to enter into a contract. A contract or agreement with a minor is null from the beginning, and no one can sue them.
What are the capacity to contract?Capacity to contract means a party has the legal ability to enter into a contract. Capacity also means a person has to be competent as defined by law. Someone's capacity is determined by whether or not they have reached the age of majority and if they are mentally capable of understanding the applicable contract terms.
What is included in mental capacity assessment?Mental capacity is assessed according to the ability of a person to make a specific decision at the time the decision needs to be made. The fact that a person is able to retain the information relevant to a decision for a short period only does not prevent him from being regarded as able to make the decision.
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