Does Everyone Have the Capacity to Enter Into a Contract?

Randy Bishop | June 14, 2018

Not everyone has the legal capacity to enter into a contract.

While we have no idea how many contracts are created daily across the United States, the number would certainly be staggering. Truthfully, most of those contracts will lead dull, boring lives. They will be formed properly and their parties will honor them in good faith.

Some, however, will have a chaotic existence, with their parties asserting allegations of breach against one another. These underprivileged contracts may even face existential issues, with their very formation being questioned.

As we have discussed before, a contract that does not have proper offer, acceptance, and consideration is not a contract at all. But those issues deal with the contract itself. Sometimes, however, a contract is attacked based upon the alleged incapacity of the person (or entity) who entered into the contract. In this article, we’ll discuss who does and does not possess the legal capacity to contract.

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I’m Only 17, but I’m Really Mature”

Let’s start with an issue of legal capacity with which most people have some familiarity – age. Under general circumstances, parties must reach the age of majority (defined as age 18 in most states) to contract. Therefore, think twice before contracting to sell your world-class baseball card collection to a 17-year-old!

As always, there are some exceptions to the general rule, and they depend on the law of each individual state. Here are some examples:

  • The contract is often voidable, not void, at the election of the minor. That means that the minor can decide whether or not to honor the contract, and the adult is stuck with the decision.

  • Contracts for necessities, like food and clothing, are sometimes exempted from the rule. The policy reason for this exception is to ensure that vendors will serve minors in need.

  • Employment contracts.

  • Artistic contracts.

  • Emancipated minors. Sometimes, minors who live on their own can be declared as “emancipated,” which is a recognition that they are essentially living as adults, apart from their parents. Therefore, it makes sense that they be treated as adults and be granted the legal capacity to enter into a contract.

Mental Incapacity

Unfortunately, many individuals have a serious mental impairment or mental incapacity. Sometimes the impairment is clear, even to a casual observer. In other circumstances, the deficit is less obvious. The manner in which the law handles these cases can vary widely by jurisdiction.

For example, in those cases where a person has been adjudicated with an impairment and a guardian has been appointed, a contract with the person (as opposed to the guardian) would often be considered void.

But what about less obvious cases, where there is no legal adjudication and a party to a contract now claims to lack capacity? On one hand, the law wants to protect those with real impairment. On the other hand, it’s possible to imagine the possibility of false claims of mental incapacity raised in an effort to avoid a legal responsibility.

Thus, legislatures and courts have developed a variety of tests to determine whether a party had the mental capacity to enter into a contract. The basic idea is to make sure that the party had the ability to truly understand the contract. Litigation is sometimes necessary to resolve this issue.

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Hey, Bartender – Make that a Double!”

So, can a contract be voided due to one of the parties’ intoxication? In a word: Maybe.

There have been cases in which a signatory to a contract was so intoxicated that a court permitted the person to later void the contract. Often, those courts would consider the intoxication so great that the other person acted with fraudulent intent. One such case, Thackrah v. Haas, 119 U.S. 499 (1886), went to the United States Supreme Court.

But unless the intoxication is extremely severe, courts are more likely to determine that the intoxicated person’s problem is self-induced, that they had the legal capacity to enter into a contract, and that such an agreement is enforceable.

Business Entities, Partnerships, and Agency

Under general agency law, a principal is responsible for the acts of an agent, so long as the agent acts within his or her authority. But who has the authority to enter into a contract for a business?

It depends greatly on the type of business and the laws of a particular state. For example, in a general partnership, all partners generally have the capacity to contract, although this can be limited in the partnership’s agreement. In the case of corporations and limited liability companies, it’s important to refer to the organization’s internal documents. For example, an LLC’s operating agreement may specify exactly who is entitled to sign various types of contracts. Similarly, with corporations, documents such as bylaws or corporate resolutions should state the officer who has the authority to sign contracts on behalf of the entity. In business transactional law, attorneys spend a lot of effort making sure the right people are signing the contracts.

We know most contracts are formed properly and just want to lead happy lives, fulfilling their contractual destinies. At ContractSafe, we’re pleased to do our part by offering contracts a safe, reliable, and convenient home in which to reside, with lots of special benefits for the humans that create them. Easy searches, secure technology, and a bevy of tools for 21st century contract management make us unbeatable. Start your free trial today.

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