Who Doesn't Have the Ability to Contract?

Certain individuals lack the legal capacity to form a legally binding contract.

Certain people are always considered to lack the legal ability (or "capacity") to contract when it comes to legally binding agreements. In legal terms, they are believed to have no idea what they're doing. Legal minors and the mentally sick, for example, are assigned to a separate category. If they enter into a contract, they consider the arrangement "voidable" (as the person who lacked capacity to enter the agreement in the first place). Voidable means that the person who lacked the legal capacity to enter the contract might either terminate it or allow it to proceed as planned. This safeguards the party that lacks capacity from being pushed to complete a transaction that takes advantage of his or her inexperience

Consider various scenarios in which a person may lack the legal competence to form a legally binding contract.

Minors are unable to enter into contracts.

In most places, minors (those under the age of 18) lack the legal capacity to enter into a contract. As a result, a minor who signs a contract has the option of honoring or voiding the contract. However, there are a few outliers. A minor, for example, cannot cancel a contract for needs such as food, clothing, or accommodation in most jurisdictions. Furthermore, a minor can only nullify a contract due to a lack of capacity if he or she is under the age of majority. In most places, once a minor reaches the age of 18 and hasn't done anything to void the contract, the deal is no longer voidable.

EXAMPLE

Carlos, a 17-year-old snowboarder, signs a long-term endorsement deal with a sportswear company. He promotes the products and keeps the money he earns from the endorsements in a bank account for numerous years. He decides to void the contract at the age of 19 in order to pursue a stronger endorsement deal. When he signed the contract at the age of 17, he claimed he lacked capacity. Carlos' attempt to nullify the agreement now is unlikely to succeed in court. See Nolo's Q&A for another example of children going into contracts. Is a cell phone contract signed by a 15-year-old valid?

Incapacity of Mind

Most contracts can be nullified by a person who lacks mental capacity or by a guardian (except contracts for necessities). The criteria for mental capacity in most states is whether the party grasped the meaning and consequence of the contract or transaction's words. The "cognitive" test is what it's called. Some states apply the "affective" test, which holds that a contract can be canceled if one party is unable to behave reasonably and the other party has reason to know about the situation. A third test, known as the "motivational" test, is used in some jurisdictions. The ability to assess whether or not to enter into the agreement is used by courts in these states to determine capacity. When used to diagnose mental illnesses like bipolar disorder, these tests might yield a variety of results.

EXAMPLE

Mr. Smalley agreed to sell an invention but then claimed that he lacked capacity and that the deal was void. Smalley had been in and out of mental facilities after being labeled as manic-depressive. Mr. Smalley's doctor indicated that while he was in a "manic" state, he was incapable of analyzing commercial agreements. Smalley was capable of contracting in his manic state, according to a California Court of Appeals, which declined to dissolve the contract. "However, the manic phase of the sickness in question is not a mental disorder that renders a person incapable to contract". To put it another way, the Court saw manic-depression as a cognitive disorder, meaning that it affected Smalley's judgment but not his understanding.

Alcohol and Drugs

People who are inebriated with drugs or alcohol are not normally regarded as incapable of contracting. In general, courts hold that persons who willfully intoxicate themselves should not be allowed to avoid contractual duties, but should instead be held accountable for the consequences of their self-induced altered state of mind. However, if one party is so inebriated that he or she is unable to comprehend the nature and consequences of the agreement, and the other (sober) party takes advantage of the inebriated party's condition, the contract may be voidable by the inebriated party.

EXAMPLE

Mr. Thackrah, a Utah resident and owner of $80,000 in mining stock, embarked on a three-month binge in the late 1800s. Mr. T's alcoholism was well-known, so a local bank engaged Mr. Haas to work with the intoxicated Thackrah. The deal was made by Haas, who persuaded Thackrah to accept $1,200 for his mining stake. When Thackrah awoke (a month later), he discovered that Haas had sold the mining shares to a local bank (apparently the real culprits in the scheme). Thackrah filed a lawsuit against Haas. The case proceeded all the way to the Supreme Court of the United States, which decided that the contract was unenforceable since the bank and Hass knew Thackrah had no understanding what he was doing when he signed it. Thackrah was required to return the shares to the bank, less the $1,200 he had already been paid.

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