Pay special attention to discussion of capacity for minors, mentally incapacitated persons, and intoxicated persons. Then, complete the exercise to determine when these contracts are void, voidable, or valid due to differing levels of capacity. CONCEPT REVIEW: Capacity is the third element of a legally binding contract. A person who has legal capacity has the mental ability to understand his or her rights and obligations under a contract and therefore, presumably to comply with the terms. On the other hand, incapacity is the possession of a mental or physical defect that prevents a natural person from being able to enter into a legally binding contract. Depending on the nature and extent of the defect, a person may have either no capacity, the complete inability to enter into contracts, or limited capacity, the ability to form only voidable contracts.