In contract law, the term 'capacity' refers to what?

In contract law, 'capacity' specifically refers to the legal ability of an individual or entity to enter into a binding contract. This includes being of a certain age, typically an adult, and having the mental competency to understand the nature and consequences of the agreement being made. In many jurisdictions, minors, mentally incapacitated individuals, and intoxicated persons may lack the capacity to contract, meaning contracts with them can be void or voidable.

The other aspects mentioned in the other options, such as mutual interest, financial ability, and willingness to negotiate, play crucial roles in the process of forming contracts but do not pertain directly to the legal qualification of being able to enter into a contract. Therefore, the focus on legal ability in relation to capacity distinctly captures its essential meaning in contract law.