Mental Capacity for Binding Contracts

Mental Capacity as a Requirement for Valid Contracts

Although there is a fair amount of overlap between mental capacity requirements as applied to wills and probate (including elder law such as guardianship related issues) when compared to the mental capacity requirements for legally binding contracts, in this article I’ll be focusing on capacity as is required to execute binding contracts only.

The Basics:

Every adult is deemed mentally competent and the burden of proof is on the party who is attempting to prove incompetency.  This same principle applies to the elderly, but not to children under the age of eighteen.  That is, children under the age of eighteen are not capable of legally contracting for anything that is not a necessity (such as food or shelter) and the elderly are presumed competent until proven otherwise.  The law presumes every party to a contract"Contract," as distinguished from "agreement," means the tot... has sufficient mental capacity to understand his/her legal rights with reference to the transaction.

Levels of Mental Capacity:

When thinking about capacity, it’s incorrect to view it as binary; rather, capacity should be thought of in levels.  For instance, a person may not possess the mental capacity to manage every aspect of his/her own life, but they may possess the capacity to purchase"Purchase" means taking by sale, lease, discount, negotiatio... groceries.  Also worth note is a person’s ability to be competent at intermittent intervals.  As an example, in the early stages of mental diseases, a person may be fully lucid and mentally competent on some days, but not possess the mental capacity sufficient to make binding decisions on other days.

A contract executed by a person lacking mental capacity is not automatically void, but voidable depending on the ability to show a lack of capacity by one of the parties involved.

The Test of Mental Capacity:

One fundamental principle of contract law is that for a contract to be enforceable, there must be a “meeting of the minds” between or among the parties to the contract.  Expanding on this principle, there can’t be a meeting of the minds if one of the parties to the agreement"Agreement," as distinguished from "contract," means the bar... isn’t able to understand the details of the agreement they are entering to a reasonable degree.

In evaluating whether a person was able to properly understand and evaluate the details of an agreement, two factors are generally considered:

  1. the party involved must be able to reasonably understand the nature and consequences of the transaction; OR
  2. if one party is unable to act in a reasonable manner in relation to the transaction AND the other party to the transaction has reason to know of the first party’s condition.
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Texas Constitution