What Does Capacity of Parties Mean?
Capacity of parties is one of the five elements required of all legally enforceable contracts alongside:
- Genuine intentions.
- Legality of object.
Without all five elements being present in a contract, it may not be legally enforceable and could be considered null and void if challenged in court.
Capacity of parties refers to each party who is entering a contract. Each is required by law to have the mental and intellectual capacity to understand the terms of the contract and to make the decision to enter it. Therefore, people such as minors, those of reduced mental acuity, and people under the influence of drugs or alcohol would not legally meet the capacity required to enter into an insurance contract.
Other parties considered by law to have no legal capacity are trade names. A trade name on its own is considered to have no legal status and therefore have no legal capacity to enter into contracts. Trade names must be attached to a corporation or a natural person via a legal designation in order to gain the capacity necessary to enter into legally enforceable contracts.
One caveat to this though is that minors have the ability to enter into contracts for necessities such as food, clothing and shelter under certain circumstances.
Capacity of parties is also known as legal capacity.
Insuranceopedia Explains Capacity of Parties
The legal concept of capacity of parties is intended to prevent people who are not mentally capable of making sound decisions from being exploited. Under the capacity of parties requirements, an insurance company could not, for example, sell an insurance plan with $5,000 monthly premiums to a ten-year-old or to someone who has a severe untreated mental illness such as schizophrenia.
These people are considered to have no legal capacity to enter into a contract because of their age or "mental impairment." However, in most circumstances, insurance companies are perfectly entitled to sell insurance policies to mentally healthy people who are over 18 years of age.
There are also unique circumstances that do allow minors to enter into contracts for necessities such as food, clothing or shelter. A simple way to demonstrate this right would be to consider what happens when a child walks into a store to buy a sandwich. Although no fancy legal documents are being signed, a purchase of a simple sandwich actually comes with an implicit contract and is governed by a whole host of consumer protection laws.
This contract guarantees, for example, that the child is getting the sandwich that they requested, that it is going to be safe to eat, and that the sandwich is as the seller described in advertising, on the menu, or other sources. The store owner cannot escape their contractual responsibilities by stating that the child did not have the legal capacity to enter into that transaction in the first place.
Another situation to note is when entering into agreements is one where one or more of the parties are under the influence of drugs or alcohol. If an agreement is struck and signed while one or more of the parties are intoxicated by drugs or alcohol, the agreement is considered “voidable”. That means if the affected party were to sober up the next day, they have the right at their sole discretion to void the contract—or, they may elect to keep it. A contract that is void is treated as if it had never existed in the first place.