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Breach, Remedies, and Defenses

Capacity to Enter a Contract

Who Has the Capacity to Make a Contract?

Capacity is the legal ability to enter into binding contracts. Most people have the capacity to enter into binding contracts, but minors, intoxicated persons, and mentally incompetent persons do not. Minors, however, will be required to fulfill certain contracts, including payments for necessities such as food, shelter, and education.

A business should avoid signing a contract with someone who does not have the capacity, or legal ability, to enter into a binding contract. If a person lacks the capacity to enter into a contract, the contract will be void (invalid) or voidable.

There are many instances that affect the capacity to contract. For example, suppose a 12-year-old child enters into a contract with an adult to buy his signed Michael Jordan basketball for $650. The contract is voidable because a child does not have the legal capacity under the law to enter into a contract.

If someone is intoxicated and enters into a contract, the contract may be deemed to be voidable. However, the intoxicated individual will have to disaffirm the contract—in other words, revoke their consent—within a reasonable time of regaining their faculties and learning about the contract. If they fail to do so, the contract could be enforceable—meaning that it is a contract that a court can force all the parties of the contract to obey—and ratified, or confirmed.

Finally, mentally incapacitated people lack the capacity to enter into contracts under the law. If a person is permanently mentally incompetent or incapacitated, the contract is either void or voidable at the insistence of a legally appointed guardian. If the incapacity is temporary and someone enters into a contract during the period of incapacity, the contract will likely be voidable so long as it is disaffirmed within a reasonable time after the person has regained their mental capacity. If it is not disaffirmed within that time, it could be deemed ratified. The court will decide what is a reasonable time.

Meaning of Capacity to Contract

Legal capacity to contract requires the ability to understand the nature of one's actions, decisions, or conduct and the legal right to enter into a contract.

How Can a Minor's Contract Be Ratified?

A contract with a minor is enforceable if the minor reaches the age of majority and expressly or impliedly indicates intention to be bound by a contract made as a minor.

Generally, when a minor enters into a contract, the law deems the contract voidable. In other words, the minor may disaffirm the contract, thereby voiding it. The purpose behind this general rule is that the minor lacks the capacity to contract under the law, but there are some exceptions.

A contract entered into by a minor is valid when the contract involves goods or services that are necessary for the child's survival. This includes items such as food, water, shelter, and so on. When this exception applies, the minor child will likely have to pay the reasonable value of the goods or services received.

However, a contract entered into by a minor can be ratified. For example, suppose that John, a 17-year-old, goes to the gym and signs a one-year membership. By law, John is deemed to be a minor, and the membership contract is voidable under the law. On his 18th birthday, John goes to the gym and tells the person at the membership desk that he intends to honor his membership and that he agrees to be bound by the terms of the agreement that he signed when he was a minor. Had John wanted, he could have disaffirmed the gym membership contract before he turned 18. Once he turned 18, unless he disaffirmed the contract within a reasonable time, his inaction could be considered his ratification of the contract.