The capacity of a party means the legal ability of a party to enter into a contract. The capacity of the parties is an essential element for a valid contract. Under the capacity of parties to contract, it specifies the person who is competent to contract. The parties must have both intellectual and mental capacity to enter into a contract. Both parties must be able to clearly understand and make the decision to enter into the contract. As per section 10, all agreements are contracts if they are made by parties who are competent to contract. It is the legal ability of the parties to form a contract. The capacity of the parties to contract is an essential element of a valid contract.