Types of Contract in Business Law: Meaning and Examples

Types of Contract in Business Law: Meaning and Examples

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Dec 19, 2023 18:34 IST

Understanding contract types is pivotal in business law. Contracts can be divided into Validity, Formation, Performance, Obligation, Content, Specialized Business Contracts, and Duration. Let's examine each type in detail and provide examples.   

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Contracts are paramount in business law as they establish legal obligations and protect parties’ rights. They clarify terms, prevent misunderstandings, and offer recourse if agreements are breached. Types of contract in business law facilitate secure business transactions, fostering trust, compliance, and accountability in the commercial landscape.

Each contract type in business law carries distinct legal implications. From express agreements with explicitly stated terms to implied contracts inferred from conduct. Unilateral contracts hinge on a promise exchanged for an action, while bilateral contracts rely on mutual promises. Executed contracts fulfil their obligations, whereas executory contracts are pending. Understanding these classifications enables businesses to navigate agreements with clarity and legal certainty. It is crucial for fostering successful and compliant commercial relationships.

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Table of Content

Let’s understand the types of Contracts in business law.

Based on Validity

Valid Contract

A valid contract is a comprehensive agreement that adheres to all legal prerequisites. It’s a mutual understanding where both parties are bound to fulfil their respective commitments. If one party fails to uphold their end, the other can pursue legal remedies, as the contract is enforceable by law.

Example: Mark agrees to lease his apartment to Lisa for $1,200 per month for one year. Both are of legal age, the terms are clear, and the agreement is in writing, making this a valid contract.

Void Contract

A void contract lacks legal standing from the outset. It’s missing one or more critical elements, or its purpose is illegal. Such a contract is null and void, meaning it’s unenforceable and has no legal effect, as if it never existed in the first place.

Example: Two individuals form an agreement to commit a bank robbery. Since the subject matter is illegal, the contract is void.

Voidable Contract

A voidable contract is initially valid and enforceable. However, one party can rescind or enforce the contract due to certain circumstances, such as misrepresentation, undue influence, or lack of capacity. If not rescinded, it remains valid.

Example: A contract signed under duress, where John is coerced into selling his car to Mike for a significantly lower price, is voidable. John can later opt to void the contract due to the undue pressure.

Unenforceable Contract

An unenforceable contract may have all the elements of a valid contract, but it cannot be enforced in a court of law due to some technicalities or legal deficiencies. The contract is neither void nor voidable, but the law denies enforcement.

Example: An oral agreement to sell real estate is typically unenforceable in many jurisdictions because the law requires such contracts to be in writing.

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Based on Formation

Express Contract

An express contract is formed when the parties explicitly state the terms and conditions, either in writing or verbally. The intentions and commitments of both parties are clearly articulated, leaving little room for ambiguity.

Example: Jane offers to buy Tom’s laptop for $500, and Tom explicitly agrees, either by saying, “I accept your offer,” or by providing a written receipt. Their mutual understanding and clear terms form an express contract.

Implied Contract

An implied contract is not expressed verbally or in writing but is inferred from the parties’ actions, behaviour, or circumstances. The law derives the existence of an agreement based on the parties’ conduct or the situation’s inherent fairness.

Example: When a person visits a doctor, there’s an implied contract that the doctor will provide medical services, and in return, the patient will pay for those services, even if no explicit agreement was made beforehand. The act of seeking and providing the service implies a contract.

Based on Performance

Executed Contract:

An executed contract is an agreement where both parties have fulfilled their obligations. In other words, the contract terms have been fully carried out, and there’s nothing left to be done by either party.

Example: Sarah pays $20 to buy a book from a bookstore. Once she pays and receives the book, the contract is executed, as both parties have met their obligations — Sarah has paid, and the bookstore has provided the book.

Executory Contract

An executory contract is one where one or both parties still have obligations to perform in the future. The contract remains in place until all parties meet all terms and conditions.

Example: John leases an apartment to Emily for a year. After signing the lease and moving in, Emily is obligated month, and John must provide the apartment for the lease’s duration. The contract remains executory until the lease ends, and all payments are made.

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Based on Obligation

Unilateral Contract

A unilateral contract involves an obligation for only one party. One party makes a promise in exchange for a specific act by the other party. The party making the promise will fulfil it once the other party completes the requested act.

Example: A “reward” poster for a lost pet is a unilateral contract. If Alice offers a $100 reward for returning her lost cat, she must pay once someone returns the cat, but no one is obligated to search for the cat.

Bilateral Contract

A bilateral contract involves mutual promises made by both parties. Each party is a promisor (making a promise), and a promisee (receiving a promise), and both have obligations to fulfil under the contract’s terms.

Example: If Bob agrees to sell his car to Susan for $5,000, Bob promises to deliver the car, and Susan promises to pay the $5,000. Both have obligations to meet for the contract to be fulfilled.

Based on Content

Standard Form Contract:

A standard form contract, often called a “boilerplate” contract, is a pre-prepared document that one party uses in multiple transactions without negotiating the terms for each case. One party sets the terms, and the other party typically agrees without much negotiation.

Example: When you sign up for a new software service online, you often agree to the company’s “Terms of Service.” These terms are the same for every user and are an example of a standard form contract.

Adhesion Contract

An adhesion contract is a standard form contract where one party, typically the one with more bargaining power, sets the terms, leaving the weaker party little choice but to “adhere” to the contract without any real opportunity for negotiation. These contracts can sometimes be deemed unconscionable or unfair.

Example: An individual signing up for insurance might be presented with a contract filled with complex terms and conditions. The individual has little power to negotiate these terms and must either accept the contract as is or decline the insurance. This is an example of an adhesion contract.

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Specialized Business Contracts

Sales Contracts

A sales contract outlines the terms for the sale and purchase of goods. It specifies item details, price, delivery, and other relevant terms.

Example: A business orders 100 laptops from a supplier. The agreement detailing the laptop specifications, price per unit, and delivery date is a sales contract.

Lease Agreements

This contract outlines the terms under which one party agrees to rent property another owns. It ensures the lessee can use the property, and the lessor is paid in return. Types of leases include operating leases and financial leases. 

Example: Jane rents an office space for her startup. The document detailing the monthly rent, lease duration, and other terms is a lease agreement.

Employment Contracts

An employment contract defines the relationship between an employer and employee, detailing job responsibilities, salary, benefits, and other terms.

Example: A company hires Alex as a manager. The employment contract specifies his salary, job duties, and benefits.

Non-compete Agreements

This contract restricts an individual (often a former employee) from competing against a former employer for a specified period within a certain radius.

Example: After leaving a tech company, Emily agrees not to start a similar business or work for a competitor within 50 miles for two years.

Partnership Agreements

This contract outlines the relationship between two or more individuals doing business together. It specifies profit/loss distribution, responsibilities, and other terms.

Example: Lisa and Maria start a bakery together. Their agreement detailing ownership percentages, roles, and profit distribution is a partnership agreement.

Franchise Agreements

This contract allows individuals to operate a business using an established company’s name and business model. It details fees, operational standards, and other terms.

Example: John wants to open a branch of a popular fast-food chain. The agreement he signs, detailing franchise fees, operational guidelines, and branding rules, is a franchise agreement.

Licensing Agreements

This contract grants one party the right to use and/or sell another party’s intellectual property (like patents, trademarks, and copyrights).

Example: A software company gives users the right to use its software under certain conditions. The document the user agrees to, detailing usage rights, restrictions, and licensing fees, is a licensing agreement.

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Based on Duration

Term Contracts

A term contract is an agreement that remains in effect for a specified period. It is explicitly mentioned in the contract. Once the duration expires, the contract ends or is up for renewal based on the agreed-upon terms.

Example: A company hires a consultant for a project expected to last six months. The agreement specifying that the consultant’s services will be retained for exactly six months is a term contract.

At-will Contracts

An at-will contract can be terminated by either party at any time without any liability, provided there’s no breach of the agreement’s terms. It doesn’t have a specified duration and offers flexibility to both parties.

Example: An employee is hired “at-will” by a firm, meaning either the employee or the employer can terminate the employment relationship at any time, for any reason (as long as it’s not an illegal reason), without incurring penalties. This employment relationship is based on an at-will contract.

Conclusion!

The diverse types of contracts in business law serve as the foundation of secure commercial interactions. From clearly stated terms in express contracts to the nuanced implications of implied agreements. Understanding these variations is essential. Businesses can navigate the legal landscape confidently, ensuring clarity, compliance, and rights protection through well-defined contract types.

Top FAQs on Types of Contract in Business Law

What is Contract in law?

A contract in law is a legally binding agreement between two or more parties that outlines their rights and obligations. It involves an offer, acceptance, consideration, and the intention to create legal relations. Contracts can be written or verbal, and they are enforceable by law.

Explain Contract based on validity and its types. 

A contract based on validity refers to the legal enforceability of a contract. There are three main types:

Valid Contract: A valid contract meets all the essential elements required by law, such as offer, acceptance, consideration, legal capacity, and lawful purpose.

Void Contract: A void contract lacks one or more essential elements, making it unenforceable from the beginning.

Voidable Contract: A voidable contract is initially valid but can be voided by one party due to factors like duress, fraud, or undue influence.

What is Express Contract?

An express contract is a type of valid contract formed through explicit verbal or written terms agreed upon by the parties involved. In an express contract, all the terms, conditions, and obligations are clearly stated and agreed upon, leaving no room for ambiguity or misunderstanding.

What are Contracts based on Obligation?

Contracts based on obligation refer to the nature of the obligations created by a contract. There are two main types:

Unilateral Contract: In a unilateral contract, one party makes a promise or performs an action, and the other party's obligation is triggered only when they accept the offer or fulfill certain conditions. Until acceptance or performance, there is no binding contract.

Bilateral Contract: A bilateral contract involves mutual promises and obligations between both parties. Both parties make commitments, and once those commitments are exchanged, a binding contract is formed.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio