Different Kinds of Contracts in Business Law
Business contracts serve to obligate the parties involved to fulfill their duties by exposing them to the risk of legal consequences in the event of a breach.3 min read
Different kinds of contracts in business law are used for different types of business agreements. Business contracts serve to obligate the parties involved to fulfill their contractual duties by exposing them to the risk of legal consequences in the event of a contract breach. Contracts may come in many different forms to suit different situations, needs, and purposes. They can be categorized based on how they are formed, what kind of consideration is being offered, how they will be executed, and whether or not they are valid.
What Is a Business Contract?
A contract refers to an agreement between two parties to create a legally-enforceable obligation to perform, or refrain from performing, a certain task. It can relate to almost any kind of transaction, including a sale, service, transfer of property ownership, or a combination of different kinds of transactions. Parties entering into a contract may be individuals, business organizations, or government agencies. A contract may involve more than two people. In most situations, only parties who enter into a contract have duties and rights under the contract.
The function of a contract is to create a legal relationship between two parties who wish to enter into an agreement and specify their obligations and rights in accordance with the agreement. Contracting parties are legally obligated to fulfill the terms stated in the contract, even if the contract seems to be a bad bargain or improvident, as long as it is not fraudulent or does not result from undue influence or duress.
Understanding the Different Kinds of Contracts
A contract can be a simple oral or written agreement that does not have to be signed, witnessed, or sealed. It can also be a formal agreement that is written, witnessed, signed, and sealed by the parties involved. Traditionally, a contract was regarded as legally enforceable only if it was sealed. Now that courts are recognizing implied contracts and other kinds of informal contracts, the use of formal contracts under seal has diminished. When it comes to contracts, there are four classifications, including:
- Contracts based on formation
- Contracts based on nature of consideration
- Contracts based on execution
- Contracts based on validity
Contracts Based on Formation
Contracts based on formation can be categorized into three groups: express contracts, implied contracts, and quasi contracts. An express contract refers to a contract resulting from an expression or conversation, while an implied contract occurs without an expression. While an implied contract can be implied in fact or implied in law, a true implied contract arises from a mutual agreement that has not been expressed in words. An implied-in-law contract is also known as a quasi contract. It is not predicated on the consent of the parties involved and exists regardless of consent.
Contracts Based on the Nature of Consideration
There are two types of contracts based on the nature of consideration: unilateral and bilateral contracts. In a unilateral contract, only one party makes a promise. Such a contract can be established with just an acceptance of an offer. In a bilateral contract, participating parties promise each other they will perform or refrain from performing an act. This type of contract is also known as a two-sided contract.
Contracts Based on Execution
Contracts based on execution can either be executed contracts or executory contracts. An executed contract is a contract in which performance is already completed. To a certain extent, the term is a misnomer since a contract no longer exists once the parties involved have fulfilled their obligations. An executory contract refers to a contract that obligates the participating parties to perform their obligations in the future.
Contracts Based on Validity
Contracts based on validity can come in five different forms, including valid contracts, void contracts, voidable contracts, illegal contracts, and unenforceable contracts. A valid contract is one that is legally enforceable, while a void contract is unenforceable and imposes no obligations on the parties involved. If a contract is established under certain physical or mental pressure, it is called a voidable contract. Such a contract may become a valid or void contract in the future. An illegal contract refers to a contract with unlawful object, whereas an unenforceable contract is a contract that has not fulfilled certain legal formalities.
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