Under what circumstance does physical impairment excuse a party from a contract?

The correct choice regarding when physical impairment excuses a party from a contract is when the impairment affects their ability to understand the terms of the agreement. This line of reasoning stems from the principle that to enter into a contract, parties must have the capacity to consent, which is fundamentally tied to their understanding of the terms they agree to.

When an individual has a physical impairment that significantly impedes their ability to comprehend the contract, such as a severe cognitive or physical disability that impacts mental processes, they may lack the capacity required to form a binding contract. This lack of capacity can render the contract voidable at the option of the party with the impairment, as they cannot fully grasp the implications and obligations they are undertaking.

In contrast, the other answer choices do not capture the essential legal principle relating to incapacity due to physical impairment. Unique services being involved or mutual agreement between parties does not negate the requirement for understanding the terms and conditions of a contract. Awareness of the impairment by the other party does not, by itself, excuse the party with the impairment; the critical factor remains whether that impairment affects the ability to understand and consent to the contract.