What does "capacity" mean in the context of a contract?

In the context of a contract, "capacity" specifically refers to the legal ability of parties to enter into a contract. This means that the individuals or entities involved must have the legal competence to understand the agreement they are entering into and must be of an age and mental state that allows them to be bound by the terms of that agreement. For example, minors, individuals declared mentally incompetent, and certain entities (like bankrupt persons) may lack the capacity to enter into binding contracts.

This concept is crucial because a contract entered into by someone who does not have the requisite capacity may be void or voidable, which means it cannot be enforced in a court of law. Therefore, ensuring that all parties have the appropriate capacity is an essential step in the contracting process.

While the ability to negotiate terms, physical presence during signing, and financial status may play roles in the overall contracting experience, they do not define capacity in a legal sense. The focus on legal competence ensures that contracts are made with parties who can understand and undertake the obligations outlined in the agreement.