Contract Law: Defenses against formation - Lack of capacity

The capacity of natural and juridical persons (legal persons), in general, determines whether they may make binding amendments to their rights, duties, and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will. Capacity is an aspect of status, and both are defined by a person's personal law:

for natural persons, the law of domicile or lex domicilii in common law jurisdictions, and either the law of nationality or lex patriae, or of habitual residence in civil law states;

for juridical persons, the law of the place of incorporation, the lex incorporationis for companies, while other forms of business entity derive their capacity either from the law of the place in which they were formed or the laws of the states in which they establish a presence for trading purposes depending on the nature of the entity and the transactions entered into.

When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. Sometimes such legal incapacity is referred to as incompetence.

Discussion.

As an aspect of the social contract between a state and its citizens, the state adopts a role of protector to the weaker and more vulnerable members of society. In public policy terms, this is the policy of parens patriae. Similarly, the state has a direct social and economic interest in promoting trade, so it will define the forms of business enterprise that may operate within its territory, and lay down rules that will allow both the businesses and those that wish to contract with them a fair opportunity to gain value. This system worked well until social and commercial mobility increased. Now persons routinely trade and travel across state boundaries (both physically and electronically), so the need is to provide stability across state lines given that laws differ from one state to the next. Thus, once defined by the personal law, persons take their capacity with them like a passport whether or however they may travel. In this way, a person will not gain or lose capacity depending on the accident of the local laws, e.g. if A does not have capacity to marry her cousin under her personal law (a rule of consanguinity), she cannot evade that law by travelling to a state that does permit such a marriage. In Saskatchewan Canada, an exception to this law allows married persons to become the common law spouse of others prior to divorcing the first spouse. This law is not honored amongst other Canadian provinces.