What does “capacity” indicate in contract law?

Capacity in contract law refers to the legal ability of parties to enter into a contract. This means that for a contract to be valid, all parties involved must have the requisite legal capacity, which generally includes being of a certain age, having sound mental ability, and not being under duress or undue influence when entering the contract. Individuals who lack capacity, such as minors or mentally incapacitated persons, may not be held to the terms of the contract, leading to potential voiding or unenforceability of such agreements.

The other options address different aspects of contractual relationships. Financial ability pertains to a party's resources to perform obligations but does not touch on the essence of legal capacity. Willingness to negotiate refers to the attitude of the parties rather than their legal ability to contract. Lastly, knowledge about contract terms relates to understanding the content of a contract rather than the legal capacity to agree to its terms. Therefore, the concept of capacity is fundamentally about the legal status and ability to engage in contractual commitments.