What does "capacity" mean in contract law?

In contract law, "capacity" refers specifically to the legal ability of individuals to enter into contracts. This concept focuses on ensuring that parties understand the terms of the agreement and have the requisite mental competence to make those decisions. Generally, individuals need to be of a certain age and have sufficient mental capacity — meaning they are not incapacitated by mental illness or intoxication — to be considered capable of entering into a binding contract.

Understanding capacity is crucial because contracts entered into by individuals who lack the capacity may be void or voidable. For instance, if a minor enters into a contract, that contract can usually be disaffirmed, protecting the minor’s interests. Thus, the definition of capacity in contract law is about the legal parameters that determine whether someone has the authority and understanding to engage in contractual agreements, making "the legal ability to enter into a contract" the correct interpretation.

The other concepts presented, such as financial ability, age of legal consent, and the requirement of written agreements, do not capture the full essence of what capacity entails in the context of contracts. While they may relate to situations or specific requirements in contract formations, they do not define capacity itself.