What is capacity to contract?

Unlike legal capacity, which all people have from birth, the capacity to contract depends on age and mental health. Some individuals lack this capacity and are not legally competent, protecting them from unintended legal or financial consequences. This primarily applies to minors and individuals with severe mental impairments

What is capacity to contract?

Capacity to contract refers to a person’s ability to enter into binding agreements. In the U.S., individuals 18 and older are generally presumed to have full capacity to contract, meaning they can legally make and accept contractual commitments, such as signing a lease or agreeing to a loan.

However, this can be limited by age or mental incapacity:

• Minors (under 18) generally lack full capacity to contract. Most contracts they enter into are voidable, meaning they can cancel them before turning 18 or shortly after. However, contracts for necessities (e.g., food, housing, or medical care) are usually enforceable.
• Individuals with mental impairments may lack capacity if they cannot understand the nature and consequences of a contract at the time of signing. If proven, a contract may be voided by a court. This applies to individuals with severe cognitive disabilities, mental illness, or intoxication at the time of agreement.

The purpose of these rules is to protect individuals from unintentionally harming themselves financially. However, the U.S. legal system determines incapacity on a case-by-case basis, rather than through strict age categories, which is the case in some countries, such as Germany.

The capacity to contract by age group

Minors (Under 18 years old)

Minors generally lack full capacity to contract, meaning most contracts they enter into are voidable. This allows them to cancel or enforce the contract before turning 18 or within a reasonable time afterward. However, there are exceptions where contracts are binding, such as agreements for necessities like food, clothing, housing, medical care, and education. Certain employment contracts may also be enforceable depending on state laws. Minors can enter into informal employment agreements, such as babysitting, gardening, or seasonal jobs, and are generally expected to fulfill their obligations under these arrangements. In some states, minors can also enter into formal contracts for part-time work, though labor laws may require parental or legal guardian consent.

Additionally, court-approved contracts, such as those in the entertainment industry in states like California, are legally binding. Minors who are legally emancipated—through marriage, military service, or a court order—are treated as adults and have full contractual capacity.

Legal representation for minors

In general, either parent can act as the legal representative of their minor child, with the authority to make decisions on their behalf. If parents have joint custody, they typically share decision-making responsibilities regarding the child’s well-being. If a minor does not have living parents or if the parents are deemed unfit, a legal guardian—appointed by a court—assumes this role.

When parents disagree on a significant matter affecting the child, such as medical decisions (e.g., vaccinations or specialized medical treatments), a family court may intervene. The court can grant one parent the sole authority to decide if it is deemed in the child’s best interest. Case law in states like Florida provides examples of such rulings.

Adults (18 years and older)

In the U.S., individuals who are 18 or older are presumed to have full contractual capacity. Any contract they enter into is legally binding unless there is evidence that they lacked the ability to understand the agreement. Mental incapacity is a common exception, where a contract may be voided if a person was unable to comprehend the nature and consequences of the agreement due to a mental disability or illness. Another exception is intoxication; if a person was severely impaired at the time of signing and unable to understand the contract, it may be voidable, though courts rarely accept intoxication as a defense unless extreme impairment is proven.

Seniors & individuals with mental disabilities

Adults, including older individuals, are generally assumed to have full contractual capacity unless evidence suggests otherwise. However, contracts may be voidable if an individual is found to have been mentally incompetent at the time of signing. Courts use two primary standards to assess mental incapacity: the cognitive test, which evaluates whether the person understood the contract, and the volitional test, which considers whether the person was able to make a voluntary decision despite mental illness. If an individual has a legal guardian or power of attorney, that guardian is responsible for signing contracts on their behalf.

Legal protections

If a person lacking capacity enters into a contract, it may be rescinded or canceled. In the case of minors, some states have additional rules regarding misrepresentation of age—while some states still allow the minor to void the contract, others may hold them responsible. Additionally, some contracts signed by minors may become fully binding once they reach the age of 18, unless they actively choose to cancel them within a reasonable time.

Limitations for adults

While there are legal age restrictions for specific activities—such as purchasing alcohol or gambling—an adult’s general ability to enter into contracts is unrestricted unless they are found to lack mental capacity at the time of signing.

A person’s contractual capacity may be wholly or partially limited due to a serious mental illness or cognitive impairment. Depending on the severity of their condition, an individual who lacks the ability to make certain decisions may still be able to legally enter into contracts under other circumstances.

For example, if an adult with diminished capacity purchases a small item, such as a candy bar at a store, this is generally considered a valid and enforceable transaction, as it falls under customary, minor cash purchases. However, whether a transaction qualifies as minor or customary depends on the situation. If the same individual enters into a long-term financial contract, such as a mobile phone agreement or loan, they may lack the ability to fully understand the legal and financial obligations involved. In such cases, a contract may be voidable if a court determines that the individual lacked capacity at the time of signing.

Capacity to contract limited due to mental health issues

In addition to minors, adults with severe mental health conditions or cognitive impairments may also have limited capacity to contract, regardless of their age. Courts determine whether a person lacks contractual capacity on a case-by-case basis, typically requiring medical evidence. The impairment must be more than temporary; short-term mental distress or situational impairment (e.g., grief or stress) does not automatically void contractual obligations.

Some conditions that may affect an individual’s capacity to contract include:

• Intellectual disability – If a person is diagnosed with an intellectual disability that significantly impairs their ability to understand contracts, a legal guardian may be appointed to handle financial matters. Courts determine this based on the severity of the disability.
• Hallucinations and psychotic disorders – Individuals experiencing hallucinations, delusions, or severe psychosis may lack the ability to understand the consequences of their actions.
• Advanced dementia or Alzheimer’s disease – Those affected by neurodegenerative conditions may be deemed legally incapable of entering into contracts if they cannot comprehend the terms and consequences.
• Severe mood disorders (e.g., bipolar disorder, major depressive disorder) – Affective disorders such as bipolar disorder or severe depression may impact a person’s decision-making ability. However, this alone does not automatically void a contract unless it is proven that the person was legally incapacitated at the time of signing.

Since protecting individuals with limited contractual capacity takes precedence over contract enforcement, courts may declare contracts null and void if they determine that an individual lacked capacity when entering into the agreement. However, only a court can make this determination, often requiring medical evaluations, which can be stressful for the person involved.

Types of legal incapacity

Individuals with mental impairments may be categorized under different levels of legal incapacity, depending on the extent of their condition:

• Partial legal incapacity – A person may have a mental disorder that affects only specific areas of decision-making. For example, they may experience hallucinations but otherwise function normally in daily life. Contracts related to complex financial or legal matters may be voidable, while routine transactions remain valid.
• Relative legal incapacity – Some individuals may have capacity for simple transactions but lack the ability to enter into long-term or complex agreements. For instance, they may be able to buy groceries or movie tickets, but they cannot sign a car lease or take out a loan without legal oversight.

Legal representation for adults with limited capacity

If an adult loses the ability to make legal and financial decisions due to illness, cognitive impairment, or an accident, they may require a legal representative to act on their behalf. In the U.S., this is typically handled through:

1. Guardianship (Conservatorship) – A court-appointed guardian or conservator is responsible for making financial and legal decisions for an adult deemed incapable of handling their own affairs. This is often the case for individuals with severe intellectual disabilities, advanced dementia, or incapacitating mental illness.
2. Power of Attorney (POA) – An individual can grant a trusted person the legal authority to manage their affairs in the event they become incapacitated. A durable power of attorney remains valid even if the individual loses capacity, whereas a standard POA expires if they are deemed legally incompetent.
3. Health Care Proxy – A designated decision-maker can be appointed for medical decisions, particularly for individuals with progressive conditions like Alzheimer’s.

While parents are the default guardians of minors, adult guardianship is only granted through a court order when necessary. Additionally, an unrelated individual, such as a spouse, sibling, or professional guardian, may be appointed to manage an incapacitated person’s legal and financial matters.

Please note the legal disclaimer for this article.