The Nuances of Capacity in Contract Formation

Recently, we discussed the concept of unconscionability in the context of contract formation. As we saw, unconscionability is something which can potentially overturn a contract which otherwise appears to be valid. Understanding unconscionability is a good way for businesspeople to get a sense of the complexity of contracts. When you form a contract, not only do certain elements have to be met, but certain principles also have to be obeyed. The concept of unconscionability, as we discussed, basically has to do with the principle of fairness. 

Another good way to explore the complexity of contract formation is to examine the actual elements of a contract in greater depth. In this post, we will examine the nuances of “capacity.” Capacity is one of the six elements of a contract, the others being offer, acceptance, consideration, legality and writing. Each of these elements may seem simple enough on the surface. But, as the common law of contracts shows us, each of these elements has nuances which need to be taken into account. Let’s go over a few of the layers which make up the concept of capacity.

First Example: Minors

In order for a contract to be valid, the parties must have the capacity to enter into the contract. But what does this mean in reality? One example is that the parties must be of the proper age. Minors, for instance, do not have the capacity to create binding contracts. This means that minors have the capability to unilaterally disaffirm contracts after they’ve been established; in other words, a contract between a minor and an adult is voidable. However, minors can choose to follow through with the terms of the contract while they’re still a minor; and, minors can choose to make the contract binding once they reach the age of adulthood. The law differs according to jurisdiction, but these points generally hold true throughout the country.

Second Example: Insanity of Mental Conditions

Another example of capacity is mental condition. Suppose two parties come together and attempt to form a contract. But, one of the parties suffers from a debilitating mental condition – in this case, let’s suppose it’s Alzheimer’s disease. In such a scenario, it shouldn’t be too difficult to understand how this condition could affect formation of the contract. If we further suppose that the disease in this case is quite serious, can we honestly say that the party suffering from Alzheimer’s has the “capacity” to enter into the contract? Most reasonable people would reply that the party suffering from the disease doesn’t have the capacity. This same reasoning can be applied to other mental conditions, such as psychosis, cases involving traumatic brain injuries, and so forth. The key point is that these conditions could potentially affect someone from understanding the terms of the contract.

Third Example: Intoxication

Another example of capacity relates to sobriety. Suppose a group of friends meet up for drinks. And further suppose that every member of the group consumes enough alcohol to be considered legally drunk or intoxicated. Then, let’s assume that two members of the group try to negotiate a business deal. They discuss terms, agree on prices, and even commit certain aspects of the contract to writing. In this case, can we say that the parties had the capacity to form a valid contract? The answer is that it depends on the particular jurisdiction. But, as a general matter, intoxication (by either alcohol or any other intoxicant) has the potential to negate a person’s capacity to enter into an enforceable contract. This makes intuitive sense. In many cases, an intoxicated person may agree to terms which they wouldn’t have agreed to if they had been sober. The law of contracts has been shaped to reflect this reality.

Reach Out to Trembly Law Today

We will continue to explore the complexity of contract formation for the benefit of the many businesspeople who read our blog. If you’d like to learn more, or if you’d like our hands on assistance with a particular contract, please contact Trembly Law Firm today. We have a team of capable business attorneys who have experience in contract formation, business law, and other related areas. Get in touch with us today by calling 954-280-6677.

Image credit: Patrick Feller

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