Types of Contracts: Everything You Need to Know
Contracts used by businesses are agreements made by two different entities that lay out some kind of terms for each side and can be enforced by law. 3 min read
Contracts used by businesses are agreements made by two different entities that lay out some kind of terms for each side and can be enforced by law.
What Is a Contract?
Contracts can be used in most transaction types.
A few kinds of transactions that contracts can cover include the following:
- Providing a service
- Performing a sale
- Transferring property ownership
The parties in a contract are the two sides coming to an agreement and can include the following:
- Business entities
- Government agencies
Usually the parties creating the contract are the only parties that the rights and requirements of the contract pertain to.
Sometimes rights and responsibilities can be given to a third party in a contract between two parties.
Life insurance contracts actually provide a benefit to a third party.
The insurance provider, the insured party, and the policy beneficiary are all involved in a life insurance contract.
Nature and Contractual Obligation
Contracts are meant to hold both parties to the terms of their agreement and to ensure that their rights and responsibilities are upheld.
A valid contract is legally enforced in a court of law. If the court finds that a contract doesn't meet the requirements of a valid contract, then it cannot be enforced.
Statutes are put in place to make sure that contract terms are fair with respect to the general population. For example, car insurance policy contracts are governed by a statute that ensures that people will have money available in case they are in an accident.
Contracts cannot exist without the consent of both parties on the basic terms of an agreement. A court cannot make up a contract for two parties.
Contracts are encouraged to be used for lawful reasons and to be made between capable individuals or businesses.
If a contract is created between two competent people, or a person and a business, or two businesses, it is generally valid and therefore able to be enforced by the court.
As long as a contract was agreed upon while no party was under duress or undue influence or participating in fraud, it is still considered valid and both parties are bound by its terms. Even if the contract seems unfair.
Parties that enter into a contract do so on "good faith," trusting that both sides intend to uphold the agreement.
Contracts cannot be terminated just because one of the parties has a change of mind or heart.
Types of Contracts
Contracts come in four different classifications under contract law:
- Nature of consideration
Void Contracts and Illegal Contracts
If any of the terms of a contract are illegal, or if it was entered into illegally, the contract is void. Not every contract that is void is also illegal.
Any contracts that are bound to another illegal contract are void, even if that particular contract was valid.
If a contract is voided but was still a lawful contract, any contracts that were connected with it are still valid.
Which Law Governs
Contract law is generally the same throughout different jurisdictions, but certain parts of contract law, like construction (or the method of understanding the right meaning of ambiguous terms) can differ.
If a contract is taken before a court of law, that court will need to decide which law governs. In order to determine this, the court will take into consideration where the contract was written, where is it meant to be applied, and for what purpose.
Usually the court will use the "center of gravity" philosophy for determining governing law over a particular contract, meaning that whichever jurisdiction is most closely related to the issue is the law that will be applied.
The contract will sometimes specify which law governs the agreement within its writings.
Sometimes the law of the area applies, so the law of the place where the contract was created and performed is that which will apply.
If two different countries come under a contract, the doctrine of international comity comes into play. So the law of both countries will govern in any issues that might arise with the contract in a pursuit of diplomacy.
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