Which statement best defines legal capacity?

The statement that defines legal capacity as "the mental competency to engage in legal agreements" accurately captures the essence of this legal concept. Legal capacity refers to an individual's ability to understand the nature and consequences of their actions in a legal context. This means that a person must possess the mental ability to comprehend the terms of a contract and the obligations it entails, which is crucial for entering into any binding agreement.

In contrast, the other options do not encompass the full definition of legal capacity. For example, limiting legal capacity to adults does not account for individuals who may be adults but lack the necessary mental competency due to various reasons, such as mental illness or cognitive impairment. Similarly, stating that it is about the application of legal rights in all contexts does not specifically relate to the capacity needed to make decisions or agreements. Lastly, focusing on financial ability misrepresents the concept by implying that capacity involves one's economic means rather than mental competency. Thus, option B accurately conveys the fundamental principle that underpins legal capacity in contract law.