What is Contractual Capacity?
The contractual capacity of a party refers to their ability or capacity to enter into a legally binding contract or agreement with another party. Without the capacity to contract, any purported contract made will likely be void or voidable. Although the parties cannot contractually agree, the law may deem that a particular party has such capacity regardless of whether the contracting parties understood or expressly provided as such at the time of conclusion of the contract . At the same time, parties must generally have the required capacity in order to protect third parties from adverse effects of transactions made with a party that is restricted in their capacity to act. The law regulates the contractual capacity of parties where it ordinarily limits the freedom of parties to contract e.g. children under the age of 18 are prohibited from contracting without assistance. Parties contracting with children will therefore need to insure that the contracting child has assistance from a parent or guardian as the case may be. Key elements that inform the determination of whether a party has contractual capacity include:
Legal Impact of Incapacity to Contract
To determine the legal capacity of contracting parties, it is important to be clear about the effects of lack of contractual capacity on contracts. The extent to which incapacity affects the contractual obligations of the parties and the creation of respective rights and obligations is generally dependent upon whether the incapacity is total or partial, temporary or permanent. A person with total incapacity is unable to enter into an enforceable contract at all. This means that a legal representative or agent cannot, in respect of such a person, conclude a contract with a person who has capacity to contract. A contract that is purportedly entered into in these circumstances is void ab initio (i.e. treated ab initio as having no legal effect). In respect of a person with partial incapacity, that is, where he or she requires assistance in the conclusion of a contract or tends to act in a manner that is prejudicial to their own interests, a contract with a person who has capacity may, depending on the nature of the incapacity, be valid or voidable. If the contract is concluded with the assistance of a legal representative or agent, the contract will be fully capable of being enforced; however, if the contract is concluded without the assistance of a legal representative or agent, the contract may be declared voidable. In the latter case, although the contract is valid, its terms and conditions are binding only provided the incapacitated party does not repudiate the contract on regaining contractual capacity. It is for the incapacitated party to decide whether the contract should be ratified or not and, as a general rule, the other contracting party will have no claim against the incapacitated party because of the delay. He or she will have to wait until the incapacity has lapsed.
Factors that Determine Capacity to Contract
Just as the essence of a contract is the agreement of the parties, the power to enter into a binding contract requires both the presence and capacity of each of the parties. Without the legal capacity to bind yourself, an agreement that may look complete on its face may have no binding effect at all. The most common example of a contract that is void for lack of capacity would be written as follows: Independent Contractor Agreement For Landlord’s Snow Removal LANDLORD: [Your Name Here] INDEPENDENT CONTRACTOR: David Parker Independent Contractor agrees that Davidson Parker LLC is a snow removal company operating in Davidson County, Tennessee. Independent Contractor agrees to provide snow removal services on or about February 7, 2014. Type of snow removal service is snow shoe removal. Type of snow removal site is front sidewalk of Davidson County Courthouse, 114 2nd Ave N, Nashville, TN. Compensation to be paid by Landlord in the amount of one dollar ($1.00). ___________________ _______________________ [Your Signature Here] David Parker As this hypothetical illustrates, there was no "dollars and cents" consideration to support the agreement. However, the law disfavors a finding of incapacity, and the above agreement could still have a binding effect if the proponent of the capacity defense can be shown to have accepted something of value as his own. In addition to the actual acceptance of benefit, the law recognizes the following five types of incapacity variants: Age: Because the age of majority is eighteen years, any lack of capacity to contract because of age is fairly easy to discern. In Tennessee, a minor has the capacity to contract for necessaries, which they are likely to need to maintain their livelihood, health, or physical well-being, but not other contracts unless the minor disaffirms (or voids) them prior to reaching the age of majority. The minority age dilemma is slightly more difficult when minor parents seek to enter a binding contract. Although a minor parent continues to have the legal status of a minor, the law and public policy encourages and facilitates the inclination towards emancipation of minor parents. Other issues that may arise include whether a minor parent can contract for the support of their child, or if their ability to work and earn wages give them right to contract independently as a matter of law. Mental Competence: A contract is voidable for mental incompetence when, at the time of entering into the agreement, the individual "did not understand the nature and consequences of his actions so as to be capable of forming a rational judgment". Intoxication: Although not discussed at length above, any condition of the mind, such as temporary insanity or intoxication, is grounds for lack of contractual capacity. The court is likely to examine the individual’s capacity once intoxicated, as well as his or her capacity to understand the consequences of a contract. If someone enters into an agreement when intoxicated, drinking and intoxication may be grounds for realignment of the parties so that the intoxicated party may not be bound to the agreement. Other possible scenarios for lack of contractual capacity include: Unconscionability: Unconscionability is the situation when an agreement is grossly unfair, to the point that it shocks our sense of fairness. Unconscionability arises in two ultimate fashions: (1) procedural unconscionability, which refers to the negotiation process; or (2) substantive unconscionability, which refers to the actual terms of the contract. Substantive unconscionability (specifically because it shifts the results at trial to one party or the other) tends be the type more often employed by the law. Duress: While the concept of duress was certainly known to ancient Rome and applied by the Roman Church, duress was long limited by the definition of force – i.e., the "fright, force, or compulsion" was required to constitute blackmail. This outmoded definition of duress was replaced by modern law recognizing that harm from non-physical threats (such as incarceration or involuntary commitment) is still harm, and sufficient to give rise to a voidable contract.
Testing Contractual Capacity
The legal tests of contractual capacity focus on whether an individual can understand and appreciate the nature and consequences of the transaction to be entered into, or whether he or she is influenced by a material mental disease or defect. The statutory test for determining whether a person is able to understand and appreciate generally the nature and consequences of the transaction or whether or not he or she is influenced by a material mental disease or defect weighs the following factors: Medical evidence is typically required to support a finding of a lack of contractual capacity. This is usually provided through the testimony of one or more qualified medical care providers . Although a jury may use lay testimony to determine whether a testator lacked the contractual capacity to sign his or her will, such lack of testimony is disfavoured and the better practice is to obtain the testimony of a physician who has personally examined the testator or other reliable evidence outlining the results of a medical examination. The assessment of the degree of contracting capacity varies among the jurisdictions. For example, in Ontario, the test is whether the individual has "sufficient capacity to know what he is doing and to appreciate any risks which he may run to himself or others from acting in the way he proposes." If a contract has been concluded with a party found to be lacking the requisite capacity, the contract will be voidable at the option of that party.
Minor’s Capacity to Contract
The law gives certain protections to individuals considered "minors," that is, less than eighteen years of age. Among those protections is the freedom to withdraw from contractual obligations. What this means is that a minor may enter into a contract, but if he or she changes his or her mind and wants to back out, the law will almost always allow him or her to do so at almost any time.
The majority of contracts entered into by minors, such as simple contracts for goods (like candy bars, soda cans, or baseball cards), will not be binding on the minor. This means that the minor may change his or her mind at any time before he or she turns eighteen, and the transaction will be void.
However, some contracts are enforceable against a minor, including: (1) contracts for necessaries (essential items such as food, shelter, and clothing), (2) contracts which are ratified by the minor once he or she has reached the age of majority (generally, age eighteen), and (3) contracts made for a beneficial purpose with parental consent. Generally, if a minor enters into a voidable contract, the minor may avoid the contract at any time, before reaching the age of majority, or within a reasonable time after reaching the age of majority. If a minor has entered into a voidable contract, the minor must either avoid the contract or adopt the contract at the time of entering into it as an adult. A later promise to perform a previous act is equivalent to making a new promise.
As an example of a contract that is not voidable merely because one party is a minor, consider the following: Adam owns a CD rich with videos of Adam’s cat, Max. Benjamin finds it on the Internet and orders a copy of the CD. Benjamin is sixteen years old and lives with his parents. After Benjamin receives the CD, he decides he wants to keep the CD, and stops paying for it. Does Benjamin owe Adam any money?
The answer depends on whether Benjamin might need the CD for school, since the contract was made while Benjamin was a minor. Considering that the CD features videos on how to care for Max, and that Benjamin could use the video to help him learn how to care for his cat, Benjamin probably is still bound to pay for the CD. On the other hand, if the CD had been one containing recordings of cats singing popular songs (which someone actually may be working on), then Benjamin can probably avoid the contract without penalty.
Increasing Awareness of Contractual Capacity
In an increasingly complex commercial environment, facing off with an individual or a business entity with limited contractual ability can lead to substantial consequences. Given that businesses can be created by agreeing to a name and purpose with only one person, it is important for other businesses to confirm that the individuals you are dealing with have the ability to bind the company under their bylaws or resolutions. This means looking beyond facial appearances of capacity and doing a little due diligence to verify who has authority to act on behalf of a corporation.
Individual persons also need to take care to verify that any agreement you are entering into has identifiable and authorized persons entering into the agreement on behalf of whoever you are dealing with. A good rule of thumb for individuals when signing contracts , whether in a professional capacity or in their individual capacity, is that the documents should always refer to you by name and otherwise identify you as an individual. It is important to sign contracts individually and not in a representative capacity if the intention is to hold individuals responsible for their actions.
The availability of information on contract capacity makes verifying that the parties to an agreement have capacity much simpler. Remember that each business that is created will typically file paperwork on that status with the government, some may even publicly post the resolutions or bylaws under which they operate. An internet search can be a good first step in verifying whether or not someone has capacity, you can also check with your lawyer for ways to confirm the existence and status of the parties to an agreement.
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