The capacity of parties refers to each party who is entering a contract. Each is required by law to have the mental and intellectual capacity to understand the terms of the contract and to make the decision to enter it.Capacity of parties refers to each party who is entering a contract. Each is required by law to have the mental and intellectual capacity to understand the terms of the contract and to make the decision to enter it.Capacity of parties refers to each party who is entering a contract. Each is required by law to have the mental and intellectual capacity to understand the terms of the contract and to make the decision to enter it.