Future Business Leaders of America (FBLA) Business Law Practice Exam

Which term refers to the legal ability to enter into a contract?

1. Competence

2. Capacity

3. Authority

4. Consent

The correct answer is: Capacity

The term that refers to the legal ability to enter into a contract is "capacity." Capacity is a fundamental requirement for a contract to be enforceable, as it determines whether the parties involved have the legal ability to enter into a binding agreement. This usually means that the individuals must be of a certain age (typically at least 18 years old in many jurisdictions) and possess the mental competency to understand the nature and consequences of the contract. Individuals who lack capacity due to reasons such as being a minor, mentally incapacitated, or under the influence of drugs or alcohol may not be able to create enforceable contracts. Therefore, capacity is essential in ensuring that all parties are legally recognized as having the ability to agree to the terms of the contract. Competence, while important in different contexts, relates more to the ability to understand and perform contractual duties rather than the legal status needed to enter a contract. Authority generally relates to a person's right to act on behalf of another, especially in an organizational setting, rather than the person's ability to contract for themselves. Consent pertains to the agreement and willingness of parties to enter a contract but does not address whether they have the legal status to do so.