What does 'capacity' refer to in the context of contract law?

In the context of contract law, 'capacity' specifically refers to the legal competence of an individual or entity to enter into a valid contract. This means that the person must have the legal ability to understand the nature and consequences of the contractual obligations they are agreeing to. Generally, certain groups, such as minors, mentally incapacitated individuals, or those under duress, may lack the capacity to form legally binding agreements, which can invalidate any contracts they attempt to enter.

Understanding capacity is critical because it safeguards individuals from entering into agreements that they do not fully comprehend or agree to voluntarily. It ensures that all parties involved in a contract are in a position to understand their rights and obligations. This concept is foundational in ensuring fairness and legal integrity in contract transactions.