Types of Contracts: Everything You Need to Know
There are many types of contracts that businesses can choose from when entering into an agreement with another entity to refrain a party from doing something.3 min read
There are many types of contracts that businesses and individuals can choose from when entering into an agreement with another entity to either create obligations or refrain a party from doing something. You can use a contract for almost any type of transaction.
You can have contracts based on a number of things such as:
- Performance of a specified service
- Transfer of ownership of a property
Contracts can be entered into by almost any entity as well. Contracts are most often created by:
Though there are some exceptions typically only parties that are under a contract will be able to enjoy the rights that the contract outlines. When rights and duties fall to a third party, the ability to assign rights to that party is often a right listed in the contract. There is also the ability to have the contract benefit a third party such as in the event of a life insurance policy.
Nature and Contractual Obligation
The primary purpose of a contract is to create an agreement and establish the obligations of both parties in accordance with the law. When two parties make a valid contract, the courts are required to enforce it unless there are specific grounds for preventing enforcement.
There are statutes that may restrict a contract or its terms if the contract affects the general public. For example, insurance contracts that protect a common carrier will be controlled and regulated by safeguards to ensure there will be financial resources in the event an accident occurs.
Courts are only empowered to enforce contracts and not create them. Parties are required to have an express or implied agreement for a contract to exist. The law does encourage parties to form contracts for lawful objectives as long as they are:
- Entered into by competent persons
- Equitably made
Even if a contract is considered to be a bad bargain, parties entering into a contract are bound by the terms unless it can be proven that the contract was a result of:
- Undue influence
Types of Contracts
Contracts have four classifications. These types of contracts are:
- On the basis of Formation
- On the basis of Nature of Consideration
- On the basis of Execution
- On the basis of Validity
Basis of Formation Types of Contracts
When discussing contracts on the basis of formation you can break down the types of contracts into three categories.
- Express - These contracts are defined by expression and conversation such as a buyer offering to purchase a house and the seller accepting the offer.
- Implied - An implied contract is one in which there has been no expression, but the contract has been implied such as choosing to sit next to each other on a bus.
- Quasi - These contracts include no offer and no acceptance. This means there is no actual contractual relationship between the parties and the contact is created by virtue of law. A quasi-contract can be created when necessities are supplied, when expenses for one person are paid by another, when one party has benefited by the actions of another, when lost tools are found, or when a payment or delivery is made by mistake.
Nature of Consideration Types of Contracts
Contracts on the basis of nature of consideration can be either bilateral or unilateral contracts.
- Bilateral - A bilateral contract is one in which considerations in both directions move after the contract. An example of a bilateral contract is a purchase of a product. One party will deliver the product by a certain date and the other party will send in payment by a specified date.
- Unilateral contract - A unilateral contract will have only one party move in a direction after the formation of the contract. An example would be a lost dog is found and returned to the owner. The owner then pays a reward for the dog being found. If the person accepts it, a unilateral contract was made.
Basis of Execution Types of Contracts
Contracts that are created on the basis of execution often include Executory and Executed.
- Executed - An executed contract refers to a contract in which performance has been completed and there is nothing left to be completed by either party. An example would be a buyer paying a salesperson for a $500 piece of furniture which they then take home.
- Executory - In this type of contract there are obligations that will be performed in the future. For example, when the property is purchased the contract will allow the buyer the time to secure funds to purchase the property shortly.
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