Types of contracts

Contracts are an integral part of business and personal transactions. A contract is an agreement between two or more parties that creates a legal obligation to perform specific acts. 

Contracts can be classified into various types based on their formation, validity, nature, and execution. Understanding the different types of contracts is crucial for creating and enforcing legally binding agreements. In this article, we will discuss the different types of contracts based on these criteria, along with examples and relevant provisions in India.

Types of contracts on the basis of the formation of the contract

Contracts can be classified into various types based on their formation. Here are the most common types of contracts and their characteristics, along with examples and relevant provisions in India:

Verbal Contracts

A verbal contract is an agreement that is made orally, without any written documentation. These types of contracts are based on trust between the parties involved and are enforceable by law. However, it is difficult to prove the terms of the agreement in court if there is no written record.

Example: A customer orders a custom-made cake over the phone and agrees to pay the baker a certain amount. The baker delivers the cake, but the customer refuses to pay the full amount, claiming that the cake was not as requested.

Provision in India: According to Section 10 of the Indian Contract Act, 1872, all agreements that meet the requirements of a valid contract, including verbal agreements, are legally binding.

Written Contracts

A written contract is an agreement that is recorded in writing and signed by both parties. This type of contract provides clarity and reduces the likelihood of disputes, as the terms are clearly defined in writing.

Example: A company hires an employee and provides them with a written employment contract that outlines the terms of employment, such as salary, benefits, and job responsibilities.

Provision in India: According to Section 2(h) of the Indian Contract Act, 1872, a contract is an agreement that is enforceable by law, and it may be either written or oral.

Express Contracts

An express contract is an agreement in which the terms and conditions are explicitly stated, either verbally or in writing. This type of contract is legally binding and enforceable.

Example: A contractor agrees to build a house for a client for a fixed price, and the terms and conditions of the agreement are clearly stated in a written contract.

Provision in India: According to Section 9 of the Indian Contract Act, 1872, an express contract is formed when the parties explicitly agree to the terms and conditions of the agreement.

Implied Contracts

An implied contract is an agreement that is not expressed in words, but is inferred from the actions and behavior of the parties involved. This type of contract is based on the conduct of the parties rather than any explicit agreement.

Example: A customer enters a store and selects an item to purchase. The customer offers to pay the price displayed, and the cashier accepts the payment. Although there is no written or verbal agreement, an implied contract is formed between the customer and the store.

Provision in India: According to Section 9 of the Indian Contract Act, 1872, an implied contract is formed based on the conduct of the parties involved.

Quasi-Contracts

A quasi-contract is a legal agreement that is created by the court in the absence of an actual contract. This type of contract is based on the principle of equity, and it is intended to prevent unjust enrichment.

Example: A person accidentally damages someone else’s property and voluntarily agrees to pay for the repairs. Although there was no actual contract between the parties, a quasi-contract is formed based on the principle of unjust enrichment.

Provision in India: According to Section 68 of the Indian Contract Act, 1872, a quasi-contract is created by the court to prevent unjust enrichment.

E-contracts

An e-contract is a contract that is formed over the internet or through other electronic means, such as email or electronic signatures. This type of contract is legally binding and enforceable.

Example: A customer purchases a product from an online retailer and agrees to the terms and conditions of the sale, which are displayed on the website. The retailer sends a confirmation email to the customer, which serves as evidence of the agreement.

Types of contracts on the basis of nature of the contracts

Apart from the formation of the contract, contracts can also be classified on the basis of their validity. Here are the most common types of contracts based on their validity, along with examples and relevant provisions in India:

Valid Contracts 

A valid contract is an agreement that meets all the legal requirements of a contract, such as the presence of offer, acceptance, consideration, and capacity to contract. This type of contract is legally binding and enforceable by law.

Example: A person agrees to purchase a car from a dealership for an agreed-upon price. The contract is in writing and signed by both parties.

Provision in India: According to Section 10 of the Indian Contract Act, 1872, all agreements that meet the requirements of a valid contract, including free consent, lawful object, and consideration, are legally binding.

Void Contracts

A void contract is an agreement that is not legally binding and has no legal effect. This type of contract is null and void from the beginning and cannot be enforced by law.

Example: A person enters into an agreement to purchase illegal drugs. The contract is void, as the object of the contract is illegal.

Provision in India: According to Section 2(j) of the Indian Contract Act, 1872, a contract that is not enforceable by law is void.

Voidable Contracts

A voidable contract is an agreement that is legally binding, but one or both parties have the option to void or cancel the contract due to certain legal or factual defects. This type of contract is enforceable unless it is avoided or canceled by one of the parties.

Example:

Provision in India: According to Section 2(i) of the Indian Contract Act, 1872, a contract is voidable if it is enforceable by law at the option of one or more parties.

Void-ab-initio Contracts

A void-ab-initio contract is an agreement that is illegal and void from the beginning due to the nature of the contract or its object. This type of contract is not enforceable by law and has no legal effect.

Example: A minor enters into a contract to purchase a car. The agreement is void ab initio.

Provision in India: As held in Mohri Biwi vs Damodas Das, the court held that agreements with minor is void ab initio

Unenforceable Contracts

An unenforceable contract is a valid agreement that cannot be enforced by law due to certain legal or factual reasons, such as the lack of a written agreement or the expiration of the statute of limitations. This type of contract is valid, but it cannot be enforced by law.

Illegal Contracts 

An illegal contract is an agreement that involves an illegal act or is against public policy. This type of contract is void and unenforceable by law.

Example: A person enters into an agreement to bribe a government official. The contract is illegal, as it involves an illegal act.

Provision in India: Section 23 of the Indian Contract Act, 1872.

Types of contracts on the basis of the nature of the contracts

Contracts can also be classified based on the nature of the contract. Here are the most common types of contracts based on their nature, along with examples and relevant provisions in India:

Unilateral Contracts

A unilateral contract is a type of contract in which one party makes a promise to do something in exchange for a specific performance from the other party. The contract is formed when the other party performs the required act.

Example: A company offers a reward to anyone who finds a lost item. The contract is formed when a person finds the lost item and performs the required act of returning it.

Provision in India: According to Section 2(f) of the Indian Contract Act, 1872, a contract is considered unilateral when only one party makes a promise or offers an act in exchange for the performance of an act by the other party.

Bilateral Contracts

A bilateral contract is a type of contract in which both parties make promises to each other to perform specific acts. The contract is formed when both parties agree to the terms of the contract.

Example: A person agrees to purchase a car from a dealership for an agreed-upon price, and the dealership agrees to sell the car for the agreed-upon price. Both parties have made promises to each other.

Provision in India: According to Section 2(h) of the Indian Contract Act, 1872, a contract is considered bilateral when both parties make promises to each other to perform specific acts.

Unconscionable Contracts

An unconscionable contract is a type of contract in which one party takes advantage of the other party’s weaker bargaining position to impose unfair or unreasonable terms. The contract is considered unfair or unconscionable.

Example: A landlord forces a tenant to sign a lease agreement with excessive rent and unreasonable terms. The contract is considered unconscionable because the tenant has no choice but to agree to the terms.

Provision in India: There is no specific provision in the Indian Contract Act, 1872, for unconscionable contracts. However, the Indian courts have recognized the principle of unconscionability in certain cases.

Adhesion Contracts/Standard Form Contracts

An adhesion contract or a standard form contract is a type of contract in which one party has all the bargaining power and presents the other party with a take-it-or-leave-it offer. The other party has no choice but to accept the terms of the contract.

Example: A person signs a software license agreement without reading the terms and conditions, as they have no choice but to accept the terms to use the software.

Provision in India: There is no specific provision in the Indian Contract Act, 1872, for adhesion contracts. However, the Indian courts have recognised the principle of unconscionability in certain cases.

Aleatory Contracts/Contingent Contracts

An aleatory contract is a type of contract in which the performance of one or both parties is contingent on an uncertain event. The contract is formed when an uncertain event occurs.

Example: A person purchases an insurance policy that pays out if a specific event, such as a fire or flood, occurs. The contract is formed when the event occurs.

Provision in India: According to Section 30 of the Indian Contract Act, 1872, an aleatory contract is a contract in which the performance of one or both parties is contingent on an uncertain event.

Option Contracts

An option contract is a type of contract in which one party grants the other party the right to buy or sell a specific asset at a specific price within a specific time frame. The other party is not obligated to buy or sell the asset.

Example: A person pays a premium for the option to buy a house at a specific price within a specific time frame. The person is not obligated to buy the house but has the option to do so.

Provision in India: Option contracts are recognized under Indian contract law. According to Section 2(h) of the Indian Contract Act, 1872, a contract is a legally enforceable agreement that creates an obligation to perform certain acts. Option contracts are considered enforceable agreements that grant one party the right, but not the obligation, to buy or sell a specific asset.

Types of contracts on the basis of execution of the contract

Contracts can also be classified based on the execution of the contract. Here are the most common types of contracts based on their execution, along with examples and relevant provisions in India:

Executory Contracts

An executory contract is a type of contract in which one or both parties have not yet fully performed their obligations under the contract. The contract is still in the process of being executed.

Example: A person agrees to purchase a car on instalment payments. The contract is executory because the person has not yet fully paid for the car.

Provision in India: According to Section 2(e) of the Indian Contract Act, 1872, an executory contract is a contract in which the obligations of one or both parties are yet to be performed.

Executed Contracts

An executed contract is a type of contract in which both parties have fully performed their obligations under the contract. The contract is completed.

Example: A person pays the full purchase price for a car in a single payment. The contract is executed because both parties have fully performed their obligations.

Provision in India: According to Section 2(d) of the Indian Contract Act, 1872, an executed contract is a contract in which both parties have performed their obligations under the contract.

Conclusion

Contracts are legally binding agreements that form the backbone of any business or personal transaction. The various types of contracts based on formation, validity, nature, and execution offer a framework for creating and enforcing these agreements. 

Understanding the different types of contracts is crucial for protecting one’s legal rights and obligations under the contract. Whether verbal or written, executed or executory, valid or void, contracts play an essential role in modern society.