Which statement best describes legal capacity in contract formation?

• A. All parties are mentally competent and of legal age to sign
• B. Only the party with the largest financial stake must be competent
• C. Capacity can be assumed if the contract is in writing
• D. Capacity is irrelevant to contract validity

Answer: (A)

Legal capacity in contract formation means each party must have the mental ability and legal status to understand and enter into the agreement. This requires being of legal age and being mentally competent to grasp the contract terms and consequences. If someone lacks capacity—such as a minor, an intoxicated person, or someone with a mental impairment—the contract may be voidable or unenforceable.

That’s why the statement describing capacity as requiring all parties to be mentally competent and of legal age to sign is the best fit. Capacity isn’t about who has the biggest financial stake, nor is it created by a contract being in writing, and it isn’t irrelevant to enforceability.