What does 'capacity' refer to in contract law?

In contract law, 'capacity' specifically refers to the legal ability of parties to enter into a contract. This concept ensures that individuals involved in a contract have the necessary legal competence to understand the terms and implications of the agreement they are entering into. For instance, minors, mentally incapacitated individuals, or those under the influence of drugs or alcohol may lack the required capacity to contract.

When considering capacity in the context of contract formation, it is essential to recognize that merely having the financial means to fulfill a contract, being present to negotiate, or interpreting legal terms does not establish one’s legal capacity. All parties must possess the mental ability and legal right to make binding agreements, thereby ensuring that contracts are enforced fairly and justly according to established legal standards.