Capacity Of Parties

What Does Capacity Of Parties Mean?

Capacity of parties is one of the five essential elements required for a contract to be legally enforceable, alongside:

• Agreement
• Genuine intentions
• Consideration
• Legality of object

If any of these five elements are missing, the contract may not be enforceable and could be deemed null and void if challenged in court.

The capacity of parties refers to the legal ability of each party entering into a contract. Each party must have the mental and intellectual ability to understand the terms and make an informed decision to enter the agreement. Certain individuals, such as minors, those with reduced mental capacity, and individuals under the influence of drugs or alcohol, may not legally possess the capacity to enter into contracts, including insurance contracts.

Additionally, trade names, by themselves, are considered to lack legal capacity. A trade name has no legal status on its own and cannot enter into contracts. To acquire the legal capacity needed, the trade name must be attached to a corporation or a natural person through a legal designation.

The capacity of parties is also referred to as legal capacity.

Insuranceopedia Explains Capacity Of Parties

The legal concept of the capacity of parties is intended to protect individuals who are not mentally capable of making sound decisions from being exploited. Under these requirements, an insurance company, for example, could not sell an insurance plan with $5,000 monthly premiums to a ten-year-old or someone with a severe untreated mental illness like schizophrenia.

These individuals are considered to lack the legal capacity to enter into a contract due to their age or mental impairment. However, in most cases, insurance companies are legally permitted to sell policies to mentally healthy individuals who are over 18 years of age.

There are also specific circumstances where minors are allowed to enter into contracts for necessities such as food, clothing, or shelter. A straightforward example is when a child buys a sandwich from a store. Although no formal legal documents are signed, the purchase of the sandwich creates an implicit contract governed by various consumer protection laws.

This implicit contract ensures, for example, that the child receives the sandwich they ordered, that it is safe to eat, and that the sandwich matches the description provided by the seller, whether in advertising, on the menu, or through other sources. The store owner cannot avoid their contractual responsibilities by arguing that the child lacked the legal capacity to enter into the transaction in the first place.

Another situation to consider is when one or more parties to an agreement are under the influence of drugs or alcohol. If an agreement is made and signed while one or more parties are intoxicated, the agreement is considered voidable. This means that if the affected party sobers up, they have the right to void the contract at their discretion, or they may choose to uphold it. A contract that is void, on the other hand, is treated as though it never existed.