What is Contractual Capacity?

Definition: Contractual capacity is an individual’s faculty to sign binding contracts with other parties either for himself or on behalf of a third party. It is a legal competence to step into an agreement.

What Does Contractual Capacity Mean?

The faculty to sign contracts is a very delicate responsibility since it allows an individual to commit himself, legally speaking, to many different situations that can have financial, political or personal consequences. This is the reason why contractual capacity has its boundaries and it can never be assumed if the nature of the contract is a complex one.

From a business standpoint, not all individuals within a company should be considered fully capacitated to sign contracts on behalf of the business. This is the reason why articles of association and other legal documents that sustain the business’ corporate governance structure clearly define who has the capacity to legally commit the company.

On the other hand, this faculty is also associated to the person’s well being at the moment of the signature. Individuals with mental disabilities or severe psychological impairments are normally considered unable to act on behalf of a third party and even for themselves. Also, a fairly reasonable argument can be presented in court to rebuke a binding agreement signed by a person under coercion.

Example

Perry is head of the Purchasing Department of a video production company. He is in charge of buying everything required to stage filming procedures and he is also the person in charge of keeping the office fully supplied. Recently, the company signed a big filming project with a well-known music artist. Perry was involved in the negotiations along with the CEO of the company, Marcus.

They were both present when the agreement clauses were drafted but a few days after that the artist’s manager called Perry to say the contract was ready to be signed and he scheduled the signing date for tomorrow. Even though Perry was present during the negotiations he doesn’t have the contractual capacity to sign the deal. Marcus, the CEO of the company, is the only one who has that faculty. Perry politely clarified the situation to the agent and he called Marcus immediately to inform him about the signing.