Why is 'capacity' important in forming a contract?

'Capacity' is critical in the formation of a contract as it refers to the legal ability of individuals or entities to enter into an agreement that is binding and enforceable. This legal ability ensures that both parties involved in a contract have the mental competence and legal authority to understand the terms and implications of the contract they are entering into.

For instance, minors, individuals with mental incapacities, or those under the influence of substances may lack legal capacity, which can render a contract void or voidable. Understanding capacity safeguards against unfairness and exploitation, ensuring that all parties are making informed decisions in a contract.

In contrast, while assessing one's ability to fulfill the contract is important, this relates to performance rather than formation. Dispute resolution mechanisms and payment terms pertain to how the contract operates post-formation rather than the conditions required to create a valid agreement in the first place. Thus, recognizing 'capacity' is central to ensuring all parties can legally engage in the contractual relationship.