Define "capacity" in the context of contracts.

In the context of contracts, "capacity" refers specifically to the legal ability of individuals or entities to enter into a binding agreement. This concept ensures that parties have the mental competence and legal authority to understand and perform the obligations outlined in the contract. For instance, individuals who are minors, mentally incapacitated, or under the influence of drugs or alcohol may lack the necessary capacity to form a legitimate contract, rendering it void or voidable.

This definition underscores the importance of ensuring that all parties involved in a contract possess the proper legal standing to affirm their intention to be bound by the agreement. It also illustrates why it is essential for businesses and individuals to verify the capacity of all parties before entering into contractual obligations to prevent future disputes or the potential unenforceability of the contract.