The validity of a contract depends on a number of different factors, including but not limited to the competency and capacity of each party to enter into the contract. Though the details of the law differs between jurisdictions, fundamentally, contracts are rendered void or voidable in the event that a party was not competent to contract in the first place.
At SignatureConfirm, users such as yourself have the opportunity to prepare, execute, and share contracts with the relevant contracting parties. Before you attempt to enter into a contract, however, it’s critical that you understand the limitations of contracting with a person who may not be fully competent.
Legal Competency
Under the law of most states, a party is deemed legally competent to enter into a contract with another party (or parties) if and only if the party fully understands the nature and consequences of the agreement. If a court of law finds that one or more contracting parties failed to understand the nature and consequences of the agreement, then they may be adjudged as having lacked the mental competency (alternatively, the mental “capacity”) necessary to form a valid, binding contract.
Whether a party understands the nature and consequences of an agreement depends on a number of different factors, including but not limited to the party’s: a) age; b) experience; c) mental health; d) intoxication; and e) relationship to the other contracting parties.
Age
Contracting parties who are legal minors are deemed inherently unable to fully understand the nature and consequences of an agreement and to negotiate the terms of said agreement on equal standing with adults. Minors may void a contract at any point.
Experience
If one party is experienced in a particular industry, and another isn’t, then a contract for which negotiation of the terms is highly dependent on experience in the industry may be unfair. For example, suppose that there is a contract for the sale of goods to a medical supply company. One of the parties has no experience in the medical supply industry and therefore does not understand the unique expectations, customs, etc. of the industry. If these factors were important to the contract itself, then the party lacking experience may be deemed incompetent.
Mental Health
Parties with significant mental health issues that prevent them from appreciating or understanding the nature and consequences of an agreement will be deemed legally incompetent for the purposes of the contract.
Mental health issues run the gamut, from bipolar disorder (i.e., a party might enter into a contract while having a high-energy manic episode), to autism, to severe depression, among many other possibilities. Generally speaking, if you are concerned about one or more of the other parties having mental health issues that could affect their ability to fully comprehend the nature and consequences of the agreement, either avoid entering into a contract or take the time to help the parties understand — if possible, consult with an attorney for additional guidance.
Intoxication
Intoxication can seriously affect the determination of legal competency. In most jurisdictions, an intoxicated person who enters into a contract can void the contract at their discretion — there is, however, a requirement that the other party knew or should have known about the legal capacity-affecting intoxication at the time that the contract was signed and executed.
It’s worth noting that juries do not frequently support the side of the intoxicated party. To succeed, the intoxicated party will most likely have to demonstrate to the court that the other party too advantage of them while they were intoxicated. It is not usually enough for there to have been an intoxicated party — the advantage must be pressed.
Bear in mind that intoxication does not always involve alcohol or other recreational drugs. A person who is rendered intoxicated by virtue of their pharmaceutical intake, for example, may be deemed legally incompetent to contract during certain periods of the day.
Relationship to Contracting Parties
Special relationships between contracting parties can lead to a situation wherein one of the contracting parties is deemed to lack the legal capacity to contract — this is particularly common when the special relationship involves one party who is vulnerable to manipulation.
Suppose, for example, a senior in a nursing home may enter into a contract with their attending nurse. The contract guarantees that the attending nurse will receive all of the estate distributions of the senior. In most states, this type of contract would be suspect due to the potential for abuse. The relationship — and the special vulnerability of the senior in such circumstances — leads to legal incompetency for the purposes of the contract.
Other special relationships that may lead to a determination of legal incapacity include teacher-student relationships, doctor-patient relationships, and more — though these situations depend a great deal on particular circumstances and whether the relationship exposed a vulnerable party to potential manipulation.
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if you’re planning to enter into a contract with other parties, it’s important to understand the limits of your agreement. Depending on the circumstances surrounding the contract — more specifically, depending on whether you or one of the other parties could be adjudged legally incompetent pursuant to the law of the applicable jurisdiction — the contract may be rendered void or voidable.