Competency and Capacity in a Contract

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In a Contracts Setting, What do the Terms “Competency” and “Capacity” Mean?

Both parties to a contract must have contractual capacity 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, and that they understand the basic nature of the contract.  Contractual capacity is sometimes referred to as “competency” or “capacity”. 

Contractual competency and capacity has nothing to do with a person’s skill in bargaining or negotiating a contract.  Just because a person does not understand every detail and provision in a contract does not mean that they lack the competency or capacity to form the contract.  It is enough if they understand that they are entering into a contract, and that they understand the general nature of the contract. 

When does a Person Lack Contractual Capacity?

Most state laws hold that minors or persons under the legal age (usually 18 or 21 years old) lack the mental capacity to form a contract.  Thus, a contract made with a minor is usually voidable at their discretion.  This means that the contract is enforceable unless the minor takes some action to void the contract. 

Also, persons who are mentally incapacitated or intoxicated are generally deemed to lack contractual capacity.  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 the Contract if a Party Lacks Competency or Capacity?

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, the party is not automatically relieved from contractual duties that they may have occurred.  The court may need to do additional analysis to determine whether they still need to fulfill any duties stated in the contract.

A common situation that may occur is where one party is intoxicated or impaired at the time of contract formation.  If the other party knew about, or had reason to know about the intoxication, the contract may be voidable at the other party’s discretion.  This is especially true if the non-intoxicated party was trying to take advantage of the intoxicated party. 

Do I Need a Lawyer for Disputes Regarding Contract Competency and Capacity?

It is often advisable that you contact a lawyer before you enter into any contract.  Your lawyer may be able to inform you if there will be any issues regarding the competency and capacity of any party entering into the contract agreement.  Also, if you believe that a contract may be voidable due to issues with contractual capacity, you may wish to speak with a lawyer for advice.   

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Last Modified: 08-31-2011 03:06 PM PDT

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