Mental Capacity to Contract

Cite this article as: Jason Mance Gordon, "Mental Capacity to Contract," in The Business Professor, updated January 10, 2015, last accessed April 8, 2020,
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Mental Capacity to Contract
This video explains that the parties to a contract must have mental capacity to enter into the contract at time of execution.

Next Article: Lawful Purpose for Contracts


What is “mental capacity” to contract?

To enter into a contract, a person must have mental capacity sufficient to understand the nature and consequences of her actions. If mental capacity is absent, the contract is voidable by the person lacking capacity. There are three classes of persons commonly understood to lack capacity to be bound by contractual promises:

Minors – A minor is someone below the statutory age of mental capacity within a jurisdiction. Generally, a person must be 18 years old or older to have the requisite mental capacity to contract. As such, a minor who enters into a contract can void the contract at any time prior to reaching the age of majority. The exception to this rule is when the contract involves goods or services necessary for the child’s survival. This could include food, water, shelter, etc. In the case of necessities, the child will be obligated to pay the reasonable value of the goods or services received. If the child fails to disaffirm the contract by this time, she thereby ratifies the contract and is bound going forward.

  • Example: Jane is 17 years old. She goes to a local gym and signs up for a year-long membership. This is not a contract for a necessity. Jane will be able to void the contract at any time before she turns 18 years old. She will, however, have to pay the reasonable cost of any value she receives from the gym.

Intoxicated Person – An intoxicated person may lack the mental capacity necessary to contract. Generally, this will require extreme intoxication. If the intoxicated person enters into a contract, she must disaffirm the contract within a reasonable time of regaining capacity and learning of the contract. If she fails to do so within a reasonable time, she has ratified the contract and will be bound.

  • Example: Don gets incredibly drunk in a bar. He does not know where he is and asks a stranger for a ride home. He offers to give the stranger, Gary, his Rolex watch in exchange for a ride home. Gary takes him home and takes the Rolex. When Don sobers up, he can immediately demand return of the Rolex. He was too intoxicated to appreciate the nature of his actions. As such, he can void the contract. He must act within a reasonable period to void the contract upon becoming sober.

Mentally Incompetent Person – A mentally incompetent person generally lacks the ability to enter into a contract. If the mental incompetency is temporary, the individual must disaffirm any contract entered into during incapacity within a reasonable time of regaining capacity. If the person is permanently incapacitated, the contract is either void or voidable at the insistence of a legally appointed guardian.

  • Example: Ernie is having psychotic delusions. He goes to a security firm and hires a private security guard. Ernie’s legally appointed caretaker will be able to void the contract based upon Ernie’s lack of mental competence to enter into the agreement.

Each state may pass additional situations in which it deems an individual mentally incompetent to enter into contractual relations.

Discussion: How do you feel about the requirement for mental capacity to contact? Do you agree with arbitrarily setting an age at which a person is deemed to have mental capacity? Why or why not? How should a person’s level of intoxication be measured to determine whether she has mental capacity to contract?

Practice Question: Phyllis is in a bar and drinking heavily. She realizes that she cannot drive in her state, so she solicits a ride from Harriet. She does not have any money, so she offers Harriet her new Rolex watch in exchange for a ride. Harriet accepts and drives Phyllis 3 miles to her home. The next morning Phyllis realizes that she traded a very expensive watch for a 3-mile ride. What are Phyllis’ options?

Propsosed Answer

People who are under the influence of drugs and alcohol are generally in no position to enter into a contract. Extreme intoxication can cause a person to lack the mental capacity to enter into an agreement. In applying this rule, the courts consider two rules:

  • Was the person intoxicated, and did the other party influence them into entering a contract? In this situation, if there is undue influence to enter into a contract, the contract will be considered voidable.
  • Was the party able to make informed decisions pertaining the situation as to enter into a contract? If the court determines that the party was not intoxicated beyond reason, and that they were sufficiently aware of their surroundings to be able to enter into a contract, and did so without undue influence from another person, then that contract shall be considered valid.
  • The court also considers if the other party was aware of the person’s intoxication at the time the contract was made.

In the above situation, Phyllis will have to demonstrate that she was intoxicated (to the point of inability to reason) and thus lacked mental capacity to contract. She may also be required to demonstrate the Harriet induced her into the agreement. For example, if Harriet offered the ride in exchange for the watch, this may be considered inducing the agreement.

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