What does "capacity" refer to in the context of contracts?

In the context of contracts, "capacity" specifically refers to a party's legal ability to enter into a contract. This legal capacity indicates that the individual or entity has the authority to engage in the contractual agreement, which includes understanding the terms and implications of the contract and being of sound mind.

For contract validity, it is essential that all parties involved possess the necessary capacity, which often excludes minors, individuals deemed mentally incompetent, or intoxicated persons. This ensures that the individuals can make informed decisions regarding their obligations and rights under the contract.

Understanding capacity is crucial in contract law because it directly impacts the enforceability of the agreement. If one or more parties lack the legal capacity, the contract may be deemed void or voidable, which can lead to significant legal consequences.