California Contracts: What is “Lack of Capacity?”

In general, to form a contract, both — or all — parties to the contract must have the capacity to enter into the contract. “Capacity” is legally defined, or more accurately, California law defines when legal capacity does NOT exist. Of relevance to San Diego business contracts, there are three common situations in which capacity is lacking:

• Contracts entered into by underage minors (without parental or court authority)
• Contracts entered into by corporations and other corporate entities that are not in good standing
• Contracts entered into by the mentally infirm/those of “unsound mind” (which might include those whose mental capacities are impaired by drugs or alcohol)

Similar to other legal issues discussed on this website, “capacity” is an issue that goes to contract formation. In particular, “capacity” or lack thereof, relates to whether a person has truly accepted or agreed to be bound by the agreement or whether the law allows them to.

San Diego Corporate Law: Minors Lack the Capacity to Enter into Contracts

Under California statutory and case law, underage minors are not capable of contracting. See Cal. Civil Code § 1556. The provision states: “All persons are capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights.” There are exceptions when the minor has obtained permission from a parent (although often that is considered a contract by and with the parent) or from a court pursuant to provisions of the Family Code. See Cal. Fam. Code, § 6700 et seq.

Importantly, a minor’s lack of capacity to contract affects only the ability of the other party to enforce the contract against the minor, not the minor’s ability to enforce the contract against the other party. This is true in other circumstances of lack of capacity.

San Diego Corporate Law: No Capacity to Contract for Corporations Not in Good Standing

Another circumstance of the lack of legal capacity is when a corporation falls out of good standing. This happens most often because the corporation fails to pay its California Franchise Tax. Under Cal. Rev. & Tax Code § 23301, all “corporate powers, rights and privileges” are suspended if a corporation fails to pay its taxes. This includes the ability to defend or prosecute a lawsuit and the ability to enter into binding contracts. Under § 23304.1, contracts entered into by a suspended corporation are voidable. See Cal-Western Business Services, Inc. v. Corning Capital Group, 221 Cal.App.4th 304, 163 Cal.Rptr.3d 911 (2nd Dist. 2013) (case filed by not-in-good-standing corporation dismissed; unable to enforce contracts).

San Diego Corporate Law: No Capacity for Those of “Unsound Mind”

Those of “unsound mind” are also considered to lack the legal capacity to enter into contracts. Cal. Civ. Code, § 38 et. seq. Section 38 states, for example: “A person entirely without understanding has no power to make a contract of any kind, but the person is liable for the reasonable value of things furnished to the person necessary for the support of the person or the person’s family.” In general, “unsound mind” means those who are “substantially unable to manage his or her own financial resources or resist fraud or undue influence.” Cal. Civ. Code § 39. However, such cannot be shown by isolated incidents of negligence or bad judgment.

San Diego Corporate Law: What About Drunkenness?

Technically, being completely drunk might mean that you lack the capacity to enter into a contract. Under severe inebriation, a person may be “entirely without understanding.” However, since, presumably, the incident of extreme drunkenness was isolated and rare, it is unlikely that you will be deemed by a court to be of “unsound mind.” Likely, a better defense is failure or lack of acceptance of an offer.

Call San Diego Corporate Law Today

For more information, call experienced business attorney Michael Leonard, Esq., of San Diego Corporate Law. Call Mr. Leonard at (858) 483-9200 or contact him via email.  Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and assists business owners in San Diego and the surrounding communities.

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