All the following statements concerning the term capacity are correct EXCEPT:

• A. There must be the capacity to execute a contract in order to be a principal.
• B. Legal capacity is necessary for a person or entity to act as a principal or as an agent.
• C. It takes less capacity to be a principal than to be an agent.
• D. A partnership can usually act as a principal.

Answer: (B)

Capacity focuses on who can enter into contracts and who can authorize others to act on their behalf. To bind a party as a principal, there must be capacity to contract. An agent, however, does not need the same level of independent legal capacity to bind third parties; what matters is that there is a valid agency relationship and authority from the principal. This means a principal with capacity can be bound by an agent acting within the scope of that authority, even if the agent’s own personal capacity isn’t the central factor. A partnership typically has the capacity to act as a principal, so that part is correct. Therefore, the statement that legal capacity is necessary for both a principal and an agent is not always true, making it the exception.