What does the term 'capacity' refer to in contract law?

In contract law, the term 'capacity' refers specifically to the legal ability of an individual or entity to enter into a binding contract. Capacity is a crucial element in ensuring that all parties involved in the contract possess the requisite legal status to understand and take on the responsibilities outlined in the agreement. This means that individuals who are minors, mentally incapacitated, or individuals under the influence of substances may lack the capacity to contract. Therefore, if a party does not have capacity, the contract may be void or voidable.

This concept plays a significant role in protecting vulnerable parties and ensuring that all contracts are formed with competent parties who have the legal authority to agree to the terms of the contract. Understanding the capacity helps prevent disputes about the enforceability of contracts when one party questions their ability to enter into such agreements.