Any adult of sound mind can enter into a contract. That is the starting point in every U.S. state, and the question of who can enter into a contract comes down to the exceptions: minors, people whose mental condition prevents them from understanding what they are signing, people so intoxicated they cannot comprehend the deal, and people a court has placed under guardianship. Business entities contract too, but only through human agents who have authority to sign.
Adults Are Presumed Capable
Contract law assumes every adult has full capacity. You do not have to prove you are competent before signing a lease, buying a car, or hiring a contractor. The burden runs the other way: if someone later claims the agreement is unenforceable, that person has to show they lacked capacity when they signed. Commerce would stall if every party had to verify the other’s mental fitness first.
The presumption holds even when a person makes a terrible deal. Signing a contract you later regret does not mean you lacked capacity. Courts care whether you could understand the agreement, not whether you negotiated well. The law only steps in when a person falls into one of the recognized categories below.
Minors
Age is the most common capacity limitation. In most states the age of majority is 18, but it is not universal. Alabama and Nebraska set it at 19, and Maryland sets it at 21 for certain purposes.1Interstate Commission for Juveniles. Age Matrix Below that age, a person has limited contractual capacity.
Minors can enter contracts, and those contracts are real. A 16-year-old who signs up for a gym membership has a functioning agreement. The difference is that the minor holds a one-sided escape hatch: they can walk away from almost any contract, even one with fair terms, because of their age. The adult on the other side has no such option. The common shorthand that “minors can’t contract” misstates this. The contract exists. The minor can choose to undo it.
How a Minor Cancels a Contract
The formal term is disaffirmance. A minor can disaffirm at any time before reaching the age of majority, and for a reasonable period afterward. “Reasonable” is not rigidly defined, but waiting months or years after turning 18 while continuing to enjoy the benefits of the contract will almost certainly be too long.
Disaffirmance is not free. When a minor cancels, they can recover what they paid, but they generally have to return what they received. States differ on how to handle items that were used, damaged, or consumed: some require the minor to return only what remains, others reduce the refund to account for depreciation or use.
If a minor does nothing after turning 18 and keeps using the goods or services, courts treat the silence as ratification. The contract becomes fully binding and the window to disaffirm closes. The same thing happens through affirmative acts like making payments, signing a renewal, or acknowledging the agreement after reaching majority.
Necessaries
One category of contracts a minor cannot simply walk away from involves necessaries: goods and services essential to the minor’s basic well-being. The classic list is food, clothing, shelter, and medical care. Many states also include education.2Social Security Administration. SI CHI01120.221 – Validity of Loans to Minors Items that feel important but are not essential to survival generally do not qualify. Automobiles, for example, are excluded in most states even when the minor uses the car to get to work.
Even here, the minor does not owe the full contract price. They owe the reasonable value of what they actually received, which may be less than what the contract says. A minor who gets emergency medical treatment has to pay a fair price for that treatment, but a grossly inflated bill could be challenged.
Emancipated Minors
Emancipation changes the analysis. When a court grants emancipation, it gives a minor (typically 16 or 17) the legal status of an adult for purposes including the ability to sign binding contracts. An emancipated minor generally cannot disaffirm the way other minors can, because the court order removes that protection.
Scope varies by state. Some grant full adult status; others allow only partial emancipation that covers specific areas like housing or employment. Courts may also look harder at contracts involving emancipated minors than at those between adults, particularly for high-risk financial agreements.
People Who Lack Mental Capacity
A person of any age may lack the mental capacity to contract if a mental illness, brain injury, or cognitive decline prevents them from understanding what they are agreeing to. Courts use two tests, and the difference matters.
The first is the cognitive test: could the person understand, in a reasonable way, the nature and consequences of the transaction? A person with advanced Alzheimer’s disease who signs over their home for a fraction of its value likely fails this test. The question is comprehension.
The second, sometimes called the volitional or motivational test, asks whether the person could act reasonably in relation to the transaction, even if they technically understood its terms. Some conditions leave a person able to read a contract on paper but unable to exercise reasonable judgment about whether to sign. Under this second test, the contract is only voidable if the other party had reason to know about the mental condition. If the impairment was not apparent and the deal was fair, the contract is more likely to stand.
Lucid Intervals
A diagnosis does not automatically strip someone of the ability to contract. What matters is the person’s mental state at the moment they signed. Someone with a serious psychiatric condition who experiences periods of clarity can make valid contracts during those lucid intervals. The question is always whether the person had sufficient understanding at the time, not whether they have a diagnosis on their chart.
This is where disputes get expensive. Proving or disproving capacity at a particular moment often requires medical records, testimony from people who interacted with the person around that time, and sometimes expert psychiatric evaluation.
People Who Are Severely Intoxicated
Alcohol and drug intoxication can be a basis for voiding a contract, but courts are not sympathetic to people who get drunk and sign bad deals. Choosing to drink does not give you an automatic escape hatch. The standard is demanding: the intoxication must be so severe that the person could not understand what they were agreeing to, and the other party must have had reason to know about the impairment.
That second requirement is what trips up most intoxication claims. If you appeared reasonably coherent and the deal was on fair terms, most courts will enforce the contract regardless of how much you had to drink. The defense works best where the sober party clearly exploited someone visibly incapacitated, such as getting a stumbling, incoherent person to sign over property for a fraction of its value.
When intoxication does void a contract, the person must still return what they received. And if they sober up and continue performing under the contract without objecting, that conduct can ratify the agreement and close the door to any challenge.
People Under Guardianship
When a court determines that an adult cannot manage their own affairs because of a significant mental or physical impairment, it can appoint a guardian through a formal proceeding sometimes called an adjudication of incompetence. The guardian steps into the legal role of making financial and contractual decisions. Any contract the incapacitated person tries to sign on their own is void from the start, meaning it has no legal force and neither side needs to take any action to undo it.
This is a crucial distinction. Most contracts signed by minors, unadjudicated people with mental impairments, or intoxicated people are voidable, not void. A voidable contract is real and enforceable unless the protected party takes action to disaffirm it. A void contract never existed in the eyes of the law. If you are dealing with someone whose incapacity has not been established by a court, assume the contract is voidable rather than void: it may be enforceable until the other party objects.
Many states now favor a tailored alternative called limited guardianship. The guardian gets authority over specific areas (managing investments, say, or making medical decisions) while the individual retains every legal right the court has not specifically transferred. If the order does not address everyday purchases, the person can still make those agreements. An elderly person who needs help managing a complex portfolio but handles rent and groceries fine should not lose every contractual right just because they need assistance in one area.
Business Entities
Corporations, LLCs, and partnerships are separate legal entities with their own capacity to enter contracts. Because a business cannot physically sign anything, it acts through human agents: officers, managers, partners, or employees who are authorized to sign on its behalf. A contract binds the company when the person who signed had the authority to do so.
Authority comes in two forms. Actual authority is what the company explicitly or implicitly grants, through corporate bylaws, a board resolution, or an operating agreement. A CEO typically has broad actual authority; a mid-level employee generally does not.
Apparent authority is trickier. It arises when a company’s own conduct leads a third party to reasonably believe someone has authority to act for it, even if they technically do not. Give someone the title “Director of Purchasing,” hand them company email and business cards, and send them to negotiate deals, and a vendor who signs with that person is probably protected even if internal rules required board approval. The company created the appearance of authority, and the law protects the outside party’s reasonable expectations. Internal restrictions on who can sign do not help the company if the outside world has no way to know about them.
Capacity Is Not the Only Reason a Contract Can Fail
Even a fully competent adult can have a contract undone if their consent was not freely given. Duress involves one party using threats or coercion, physical or economic, serious enough that a reasonable person would feel they had no real choice. Undue influence is subtler and typically arises in relationships with a built-in power imbalance: an elderly parent and the adult child managing their finances, a client and a long-time attorney, a patient and a caregiver. The claim there is not that the person lacked mental capacity but that someone in a position of trust manipulated them into an agreement they would not otherwise have made. These are separate doctrines from capacity, with different evidence and different legal standards, though in some cases both claims can apply to the same contract.