Types of Contract

              Types of Contracts

 – Based on Validity

Now that you know what a contract is, can you identify the various Types of Contracts? Proper knowledge of the types of contracts is essential as it will allow you to decide the legal ramifications of an agreement. Here we will see the different Types of Contracts classified as per their validity.

Types of Contracts On The Basis Of Validity

Chapter 2 of the Indian Contract Act, 1872 discusses the voidable contracts and void agreements. On the basis of validity or enforceability, we have five different types of contracts as given below.

Valid Contracts

The Valid Contract as discussed in the topic on “Essentials of a Contract” is an agreement that is legally binding and enforceable. It must qualify all the essentials of a contract.

Void Contract Or Agreement

The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not enforceable by a court of law as void.

We have already stated examples of these kinds of contracts in the “Essentials of a Contract”.

Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A dies of natural causes in 4 years. The contract is no longer valid and becomes void due to the non-enforceability of the agreed terms.

Voidable Contract

These types of Contracts are defined in section 2(i) of the Act: “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” This may seem difficult to wrap your head around but consider the following example:

Suppose a person A agrees to pay a sum of Rs. 10,0000 to a person B for an antique chair. This contract would be valid, the only problem is that person B is a minor and can’t legally enter a contract.

So this contract is a valid contract from the point of view of A and a “voidable” contract from the point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus this is a voidable contract.

A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be bound to the terms of the contract. For example, person A in the above example.

The other party is not bound and may choose to repudiate or accept the terms of the contract. If they so choose to repudiate the contract, the contract becomes void. Otherwise, a voidable contract is a valid contract.

Illegal Contract

An agreement that leads to one or all the parties breaking a law or not conforming to the norms of the society is deemed to be illegal by the court. A contract opposed to public policy is also illegal.

Several examples may be cited to illustrate an illegal contract. For example, A agrees to sell narcotics to B. Although this contract has all the essential elements of a valid contract, it is still illegal.

The illegal contracts are deemed as void and not enforceable by law. As section 2(g) of the Act states: “An agreement not enforceable by law is said to be void.”

Thus we can say that all illegal contracts are void but the reverse is not true. Both the void contracts and illegal contracts can’t be enforceable by law. Illegal contracts are actually void ab initio (from the start or the beginning).

Also because of the criminal aspects of the illegal contracts, they are punishable under law. All the parties that are found to have agreed on an illegal promise are prosecuted in a court of law.

Unenforceable Contracts

Unenforceable contracts are rendered unenforceable by law due to some technical. The contract can’t be enforced against any of the two parties.

For example, A agrees to sell to B 100kgs of rice for 10,000/-. But there was a huge flood in the states and all the rice crops were destroyed. Now, this contract is unenforceable and can not be enforced against either party.

                   Types of Contract

 – Based on Formation

While getting into a contract various aspects are to be taken into consideration. Like if the contract has to be in written form, it must be an Express Contract. Similar to the express contract, we have four other types of contracts based on the formation of the contract. Let us learn more!

In the essentials of a contract, we saw some important aspects of an agreement as well as a contract. We also saw that some contracts are void contracts if certain aspects are missing from them. For example, a contract for a lease is void if it is not registered.

Such conditions allow us to classify contracts on the basis of the terms or conditions under which the agreements or contracts come into existence. On the basis of the formation of a contract, there are four types of contracts. They are listed below.

Express Contract

The Section 9 of the Act defines what is meant by the term express: “Promises, express and implied —In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express.”

This means that if a proposal or a promise is expressed by listing the terms in words – in writing or orally is said to be an Express Contract as long as it gets acceptance from the other party.

The terms of the Express Contract are clearly stated either orally or in writing. So the main aspect of the Express Contract is that the terms of the contract are expressed clearly. For example, consider the following:

A person A sends a text from his phone to person B, proposing to sell their bike for a cost of Rs. 10,000/-. The person B calls the first person and agrees to the terms of the promise.

This is an Express Contract as the terms have been stated clearly in oral as well as written form. Note that the communications could be entirely oral or written.

Implied Contracts

The second part of section 9 of the Act defines what is meant by an implied contract: “In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

Going by the definition we can say that a contract in which the terms of the agreement are not expressed in written or oral form is an implied contract. Let us see an example to understand this.

For example, you board a rickshaw and the driver starts to drive. You tell the driver the address where he has to drop you. The driver stops and you pay him.

As you can see this is a contract but did you and the driver express any of the terms in written and oral form? No, the intent was implied by your conduct and thus there was an implied contract.

Quasi-Contract

They are not contracts in the sense that no agreements are made between any of the parties. In fact, there is no contract prior to some court order. Let us first see an example and then we will get a clear idea of what we mean by Quasi-Contract.

For example, a bank mistakenly transfers a large amount of money into your account. Now there is no written or oral or any sort of agreement between you and the bank but the money doesn’t belong to you.

You will have to return the money even if you don’t want to. The bank will approach the court and the court will issue an order to return the money, which is becoming a quasi-contract.

So here we see that a quasi-contract is not agreed upon by the two parties but it comes into existence by a court order. It is thus enforced by the law which also creates it. Most of the times the quasi-contract is created to stop any of the parties from taking unfair advantage of the other.

Consider this example. You have a yard and you commission a person to build a small door for your car. You come home one day to find out that the mansion has made a big door which is very expensive. At the same time very good for the value of your property. Now, what would happen if you both approach the court?

The courts usually enforce what is known as the “Quantum Merit” which means “as much as is deserved.” Since the work was done also increased the value of your property, it would be immoral if the worker doesn’t get paid for the extra work and materials. The payment might be lesser than the normal cost but the quantum merit will apply. This is a quasi-contract.

E-Contract

When a contract is formed by the use of electronic devices and means, it is called an electronic contract or an e-contract. The electronic means and devices may include emails, tests, telephones, digital signatures etc. They are also known as the Cyber contracts, the EDI contracts or the Electronic Data Interchange contracts. The terms of the contract are listed by electronic means or implied by the actions of the users.

                Types of Contract

 – Based on Performance

There are various types of contract, one such type are contacts based on their performance. The basis for this type is whether the contract is performed or still to be performed. Accordingly, the two types are known as executed contracts and executory contracts. Let us learn more.

Executed Contracts

A contract between two or more parties is said to be executed when the act or forbearance promised in the contract has been performed by one, both or all parties. Basically, it means that whatever the contract stipulated, has been carried out. Thus the contract has been executed.

Let us see an example of an executed contract. Alex goes to the local coffee shop and buys a cup of coffee. The barista sells her the coffee in exchange for the cash payment. So it can be said that this is an executed contract. Both parties have done their part of what the contract stipulates.

In most executed contracts the promises are made and then immediately completed. The buying of goods and/or services usually falls under this category. There is no confusion about the date of execution of the contract since in most cases it is instantaneous.

Executory Contracts

In an executory contract, the consideration is either the promise of performance or an obligation. In such contracts, the consideration can only be performed sometime in the future, hence the name executory contract. Here the promises of consideration simply cannot be performed immediately.

The best example of an executory contract is that of a lease. All the conditions of a lease cannot be fulfilled immediately. They are performed over time. Similarly, say Alex decides to tutor some students in Physics. They pay her Rs 2500/- at the start of the month. But here the contract isn’t executed since Alex has to still carry out her promise. So such a contract is an executory contract.

Now even in executory contracts, there are two types, namely unilateral and bilateral contracts. Let us take a look at both times.

As the name suggests these are one-sided contracts. It usually comes into existence when only one party makes a promise, which is open and available to anyone who wishes to or can fulfil the said promise. The contract will only be fulfilled once someone fulfils the promise.

Let us see an example. Alex lost his bag pack on the metro. So he decided to announce a reward of Rs 1000/- to anyone who finds and returns his bag with all its contents. Here the is only one party to the contract, namely Alex. If someone finds and returns his bag he is obligated to pay the reward. This is a unilateral contract.

Bilateral Contracts

By contrast, a bilateral contract is one that has two parties. It is a traditional type of contract most commonly known and occurring. Here both parties agree to the terms of the agreement and thus enter into a contract. Hence it is also known as a reciprocal contract

In bilateral contracts, both parties have usually agreed to a time frame to carry out the said contract. Say for example the contract of sale of a house. The buyer pays a down payment and agrees to pay the balance at a future date. The seller gives possession of the house to the buyer and agrees to deliver the title against the specified sale price. This is a bilateral contract.

Contract Act 1872