Karen is a 16-year-old student living locally in Surry Hills, Sydney with her parents. Her parents have just moved interstate, but Karen wishes to finish her studies at her current school. She mentions to her aunt, Cindy who also lives locally in Sydney. Cindy runs a small dry-cleaning business - working 5 pm to 8 pm every evening. Cindy says to Karen "If you help me with my dry-cleaning business every evening, I will offer you room and board for free. Karen asks Cindy how many days per week she would have to work - saying that working every day would be very tiring on top of her studies and sporting commitments - Karen is part of the school swimming team. Cindy says, "we can work around your swimming commitments - just make sure you work at least 3 days a week". Karen says "great!" and moves in with Cindy. After several weeks of Karen combining working three days a week, studying and swimming after school, she is exhausted. She is afraid to tell Cindy that she cannot cope because she is worried that she will be kicked out and forced to move interstate to join her parents. Karen starts missing work and sleeping in every morning because she is not coping with work, studies and sporting commitments. Finally, Cindy confronts Karen and says, "we have a contract - you must keep working for me or you will have to pay me for room and board".

Does Karen have capacity to enter into a legally binding agreement with Cindy?