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Types of Contracts

Signing a contract ties up an individual to a set of duties that needs to be unconditionally met in order to achieve an end goal. Breaching the contracts can bring about serious implications to each of the signatories. Learn about the different types of contracts in this blog.

Introduction

This article focuses on the various classification of contracts existing in India. Go through the exhaustive list to grab a decent idea of this segment of law.

The terms and conditions of contract seem to vary based on the classification of contracts we are considering. In this regard, each contract is bound to be unique, also they fulfil a particular purpose. Therefore, you should know the specific applications as you may need to draft them in future. Some similarities are also noted besides the vast range of disparities. 

Classification of contracts is made based on their drafting procedure, applicability, highlighted characteristics and nature of execution. In this article, you may find a few types of contracts that coincide with each other. For instance, you can come across a contract that is verbal, unilateral and valid at the same time. Usually, all these adjectives describe different contracts but at times they represent a specific class.

 Did you know what the oldest contract in the world is? It’s a Sumerian contract dating back to around 2600 BCE, documenting the sale of a field and house. As sedentary civilizations evolved during the Bronze Age, contracts became an essential component of daily economic life.

Factors of Classification of Contracts

The Indian Contract law classification all contracts depending on several factors that we are about to discuss here. Contracts are drawn to legally acknowledge the transfer of resources, and provide proof of employment, tenancy, etc. Here, we have listed the fundamental criteria governing the classification of contracts:

  • Formation
  • Consideration ground
  • Execution
  • Validity

Classification of Contracts Based on Formation

1. Express Contract

When we say express contracts, we talk about agreements that have been entirely spelt out orally or in written format. A minimum of two legal entities are involved in these types of contracts. They decide to stay legally compliant by following the terms of this contract. The express contract has to be a definite scheme offering unconditional acceptance provided there are some exceptional conditions attached to the treaty. Each party must offer the other individual something in the process, this element does not necessarily need to be monetary always.

2. Implied Contract

A legally enforced obligation that binds multiple parties in an agreement to ensure certain conduct, actions or conditions from their end, is termed an implied contract. The effect of an implied contract is assumed to be equivalent to an express contract but both the agreements differ based on their formation patterns. No written statement or verbal affirmation is compulsory for an implied contract, on the other hand, everything is documented well prior in the case of an express contract on which the involved ends sign voluntarily. 

Implied contracts were introduced assuming no individual should try to avail unjust benefits by exploiting a system established by another person or business. Therefore no verbal or written format is recommended to enforce fair trade. Let us understand with an example. Implied warranties represent a form of an implied agreement. 

Suppose you buy a new television, it is generally accepted that the TV must perform in the best possible manner to fulfil the seller’s commitment. If this condition is not met then you can assume that an implied contract has gone invalid. 

As no signed legal documents exist in these cases, implied contracts give rise to arguments. For this reason, the court of law has limited its applicability. For instance, real estate deals can never be settled through implied contracts.

3. Quasi Contract

Much dissimilar to other contracts, Quasi-contracts tend not to legally bind the involved parties. The court of law has set the regulations for a quasi-contract. 

Limited circumstances are dealt with the help of quasi-contracts:

  • Situations where you pay on behalf of another individual 
  • Wherever supply of essentials takes place
  • Under conditions where someone profits from the efforts put by another
  • Upon wrongly made payments
  • When someone finds lost items 

4. E-Contract

Electronic Data Interchange or Cyber contracts are generated digitally. We widely incorporate these agreements in the modern business and professional sphere as they can easily be produced and distributed to the intended recipient via email. You can request the signatory party’s personal information, consent and digital signature by sharing an e-contract. They have the same effect as express contracts when every clause is vividly stated, also the regulations may be implied by the user’s activities.

5. Verbal Contract (Oral Contract)

Verbal contracts are legally binding agreements that are formed through spoken words and are not necessarily recorded in writing. While these contracts are enforceable, proving the terms and conditions can be challenging in the absence of written evidence.

6. Written Contract

Written contracts are formal agreements that are documented in writing and signed by all involved parties. These contracts are typically more straightforward to enforce and provide a clear record of the agreed-upon terms.

Classification of Contracts Based on Consideration Ground

Under this head, we have bilateral and unilateral contracts. Bilateral contracts involve two signatories who mutually agree to the terms put forward by the opposite person. Whereas, in unilateral contracts, one person or entity proposes a commitment. This promise can be availed by any individual who wishes to participate in the plan.

1. Bilateral Contracts

Bilateral contracts involve an exchange of promises between two parties, where both parties are legally obligated to fulfil their promises. For example, in a sales contract, the buyer promises to pay, and the seller promises to deliver the goods.

2. Unilateral Contracts

Unilateral contracts are agreements in which one party makes a promise in exchange for a specific action or performance by the other party. These contracts are only formed when the action is completed. For instance, a reward offer for finding a lost item is a unilateral contract.

3. Unconscionable Contracts

Unconscionable contracts are those that are so one-sided and unfair that they shock the conscience. Courts may deem such contracts void or unenforceable due to their oppressive nature.

4. Adhesion Contracts

Adhesion contracts are typically presented on a take-it-or-leave-it basis, with one party having significantly more bargaining power. These contracts are often used in consumer transactions and may have terms that favour the party with more leverage.

5. Aleatory Contracts

Aleatory contracts are those where the performance of one or both parties depends on an uncertain event, such as an insurance contract where the payout depends on the occurrence of an insurable event.

6. Option Contracts

Option contracts provide one party with the right to choose whether to enter into a contract at a later date. This gives the option holder the flexibility to decide if they want to proceed with the contract.

Classification of Contracts Based on Execution

Based on the execution clause, there is an executed contract. Terms entered in an contract get capitalized only when the performance markers prescribed under it get fulfilled by each member of the contract. You can experience the instantaneous application of these agreements when you avail services from the market or purchase commodities. 

Next, you get to see executory contracts. This contract is based on the future performance of the highlighted product or service. If the traded item or facility fails to live up to the commitments, the terms agreed in an executory contract turn into void.

1. Executory Contract

Executory contracts are agreements in which one or more parties have not yet fulfilled their obligations. The promises made in the contract are to be performed at a later date.

2. Executed Contract

Executed contracts are those in which all parties involved have fulfilled their obligations as per the contract terms. The contract is considered completed.

Classification of Contracts Based on Validity

1. Valid Contract

Valid contracts meet all the essential elements required by law, such as offer, acceptance, consideration, legal capacity, and a lawful purpose. These contracts are legally enforceable.

2. Void Contract

Void contracts are agreements that are considered null and void from the outset because they lack a legal purpose or involve illegal activities. They have no legal effect.

3. Voidable Contract

Voidable contracts are valid agreements but can be voided by one of the parties due to factors like misrepresentation, duress, undue influence, or lack of capacity. The contract is valid until one party chooses to void it.

 4. Void-ab-initio Contract

Void-ab-initio contracts are those that are void from the beginning. These often involve illegal activities or unlawful subjects that cannot form the basis of a contract.

5. Unenforceable Contract

Unenforceable contracts are technically valid but cannot be enforced due to certain legal defects, such as the absence of a written agreement required by the statute of frauds.

6. Illegal Contract

Illegal contracts involve agreements to perform unlawful activities. These contracts are both void and illegal and cannot be enforced by any party.

Conclusion

Contracts encourage smooth execution of a process by legally binding the multiple individuals who accept a set of regulations. Written contracts are most popular while there are even verbal contracts enforceable in the modern world. The detailed classification of contracts however relies on numerous components which we have discussed about in this article. To go through relevant textual references, consider following Vakilsearch.

FAQs:

Are oral contracts legally enforceable?

Yes, oral contracts are legally enforceable in many jurisdictions, but proving the terms and conditions can be challenging. It's generally advisable to have written contracts for clarity.

What are the differences between a contract and an agreement?

An agreement is a broader term that refers to a mutual understanding between parties, while a contract is a legally binding agreement that includes specific terms and conditions enforceable by law.

Why is consideration important in a contract?

Consideration is essential in a contract because it represents something of value exchanged between parties. It is a fundamental element that distinguishes a binding contract from a mere promise.

What is the difference between a bilateral and unilateral contract?

In a bilateral contract, both parties exchange promises and are legally obligated to fulfil them. In a unilateral contract, one party makes a promise in exchange for a specific action by the other party, and the contract is formed upon completion of that action.

What are the 8 essential elements of a contract?

8 elements of contracts include Legality, Capacity, Offer, Consideration, Intention, Certainty, and Acceptance to hold legal validity and enforceability. Absence of any component may invalidate the contract's enforceability.

What are the 4 essential features of a contract?

The 4 essential features necessary for a legally binding contract include: Offer, acceptance, consideration, and intention to create legal relations

What are the 5 characteristics of contracts and explain each?

The the 5 characteristics of contract requires: Offer: One party proposes terms Acceptance: The other party agrees to the terms Understanding: Clear comprehension of terms Consideration: Something of value exchanged Capacity: Legal ability to enter into a contract.

What is termination of a contract?

Terminating a contract occurs when one party decides to end the agreement before the other party completes their obligations. For instance, a client might terminate a services contract with a law firm according to the termination terms outlined in the agreement's terms and conditions.

What is the law of contract Act?

The definition of ‘Contract’ in the Indian Contract Act, 1872, as outlined in section 2 (h), states that it is ‘An agreement enforceable by law.’ In simpler terms, a contract is essentially an agreement that holds legal enforceability within the jurisdiction.

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