Who Lacks the Capacity to Contract?

Certain people lack the legal ability to enter into a binding contract.

By , Attorney

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 Minor

A 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.

Example of a Minor Voiding a Contract

Sean, 17, a snowboarder, signs a long-term endorsement agreement for sportswear. He endorses the products and deposits his compensation for the endorsements for several years. At age 19, he decides he wants to void the agreement to take a better endorsement deal. He claims he lacked capacity when he signed the deal at 17.

A court probably will not permit Sean to now void the agreement.

Mental Incapacity and Contracts

A 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.

States use different tests to determine whether a person had the mental capacity to enter into a contract.

The cognitive test. 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.

The affective 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.

The motivational test. 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 can produce varying results when applied to mental conditions such as bipolar disorder.

For example, suppose Mr. Smalley contracts to sell an invention, and then later claims that the contract was void because he lacked capacity. Smalley has been diagnosed as manic-depressive and has been in and out of mental hospitals. His doctor states that Mr. Smalley wasn't capable of evaluating business deals when he was in a "manic" state.

Smalley's case goes to court and the court refuses to terminate the contract, deciding that Smalley, in his manic state, was capable of contracting. The judge goes on to say: "The manic phase of the illness under discussion is not, however, a weakness of mind rendering a person incompetent to contract ." In other words, the court's view of manic-depression was cognitive—that the condition might have impaired Smalley's judgment but not his understanding.

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.

For example, consider this real-life example from the 19th century: Mr. Thackrah, a Utah resident and owner of $80,000 worth of mining stock, went on a three-month bender. Mr. T's fondness for alcohol was well known, and a local bank hired Mr. Haas to contract with the inebriated Thackrah.

Haas did the deal, getting Thackrah to agree to accept $1,200 for his mining stock. When he sobered up (a month later), Thackrah learned that Haas had turned over the mining shares to a local bank (apparently the real culprits in the scheme).

Thackrah sued Haas. The case went all the way to the U.S. Supreme Court, which ruled that the agreement was void because the bank and Hass knew that Thackrah had no idea what he was doing when he entered the contract. The bank had to return the shares to Thackrah, less the $1,200 he had already been paid.

For more information on contracts, check out our book Contracts: The Essential Business Desk Reference, by Rich Stim (Nolo).

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