In contract law, the capacity of parties refers to their legal ability or competency to enter into a contract. Capacity is an important element because contracts entered into by parties lacking capacity may be void or voidable. Here are the three main categories of capacity:

1. Legal Capacity:

   - Legal capacity means that a person is of the age of majority and sound mind, making them legally competent to enter into contracts.

   - The age of majority varies by jurisdiction but is typically 18 years old in many places. Minors (those below the age of majority) may lack legal capacity to enter into certain contracts, and such contracts may be voidable at their discretion.

   - Sound mind refers to mental competence. Parties with severe mental disabilities or incapacities may lack legal capacity to contract, while those with temporary impairments may still have capacity.

2. Lack of Capacity:

   - Individuals who lack the legal capacity due to factors such as mental illness, intoxication, or being under the age of majority (minors) may not be able to form legally binding contracts.

   - Contracts entered into by parties lacking capacity are often voidable, meaning they can be affirmed or voided by the party lacking capacity or their legal guardian.

3. Limited Capacity:

   - In some cases, a party may have limited capacity due to a specific condition or circumstance, such as a minor entering into a contract for necessities like food or clothing. In such cases, the contract may be enforceable to a limited extent.

   - Courts may assess whether a party had sufficient capacity to understand the contract's terms and implications.

It's important for parties entering into contracts to ensure that all involved have the necessary legal capacity. Contracts entered into by parties lacking capacity are at risk of being invalidated or challenged in court. Legal advice may be sought to understand the capacity requirements in specific situations.