Key Takeaways

  • Legal contracts are binding agreements enforceable in court, requiring an offer, acceptance, consideration, and mutual intent to create legal obligations.
  • They can be written, oral, or implied by actions and may involve individuals, businesses, or government entities.
  • Common types include express, implied, executed, executory, and contracts under seal.
  • Additional categories include unilateral vs. bilateral, adhesion, aleatory, option, and conditional contracts.
  • Poorly drafted legal contracts can lead to disputes, litigation, and financial loss.
  • Digital technology and AI are increasingly used in drafting, managing, and storing legal contracts, but human review remains critical for enforceability.

What Is a Contract?

Types of legal contracts encompass any agreement between at least two individuals or businesses that creates a legal obligation to do or not do something specific, such as provide a service. The legal contract puts the agreement in writing and outlines the associated duties and rights of each party.  All valid legal contracts must be enforced by the appropriate court. 

Contracts that affect members of the public are governed by specific statutes. For example, an insurance contract guarantees that financial resources will be available to the individual who signed the contract in the event of an accident.

A contract must be created by the parties themselves, not by the court. If parties cannot agree on the terms of a contract, the contract does not exist. The law encourages competent parties to form contracts for the purpose of completing legally allowed objectives. In general, if both parties are competent, the contract is valid and thus enforceable by the court. The parties must legally abide by the agreed-upon terms even if they do not prove beneficial, provided that the contract was not signed under fraud or duress.

Almost any transaction can be covered by a contract. While different business situations require different types of contracts, all must include an offer, terms of the offer, and acceptance by both parties. Common contracts include those governing a sale, service, property ownership transfer, or a combination thereof. The parties to a contract can be individuals, corporations, partnerships, or even branches or departments of the government. A contract can be among more than two parties. 

Only those parties that have signed a contract are bound by its rights and duties, with certain exceptions. In some cases, these rights or duties can be legally assigned to a third party. A life insurance contract is an example of third-party contract involvement since it includes the insured, the beneficiary of the policy, and the insurance company.

A written agreement between two or more parties is not necessarily a legally binding contract. When a contract is valid, the courts will enforce the rights and responsibilities therein.

Additional Classifications of Legal Contracts

In addition to general definitions, legal contracts can be further categorized based on how they are formed and the obligations they impose:

  • Bilateral Contracts – Both parties exchange promises and are bound to perform (e.g., a sales agreement where one delivers goods and the other pays).
  • Unilateral Contracts – Only one party makes a promise, and the other accepts by performing (e.g., a reward contract).
  • Adhesion Contracts – Standardized agreements offered by one party with stronger bargaining power, often “take-it-or-leave-it” in nature.
  • Aleatory Contracts – Performance depends on the occurrence of a specific event, often used in insurance.
  • Option Contracts – Give one party the right, but not the obligation, to engage in a transaction within a set time frame.
  • Conditional Contracts – Take effect only if certain specified conditions are met.

These classifications help determine how obligations are enforced and which legal defenses may apply.

Contracts Under Seal

At one time, a contract had to be stamped with a seal to qualify as legally enforceable. The seal was used to represent the agreement between all parties that failure to abide by the contract would result in legal consequences. Today, most jurisdictions do not require a seal for a contract to be valid. In fact, some courts even legally recognize implied contracts.

Importance of Proper Drafting

The strength of a legal contract lies in clear and precise drafting. Ambiguity or missing terms can result in disputes, litigation, and unintended liability. A well-drafted contract should:

  • Define all terms and parties unambiguously.
  • Include clear payment terms, performance obligations, and deadlines.
  • Specify remedies for breach, including damages or termination rights.
  • Address applicable law and jurisdiction.
  • Cover dispute resolution methods, such as mediation or arbitration.

Inadequate drafting not only increases the risk of conflict but can render parts of the agreement unenforceable.

Express Contracts

With this type of contract, the parties detail the terms in writing or orally when the contract is formed. An offer is made to and accepted by the recipient with a full understanding of its terms and conditions.

Implied Contracts

Implied contracts are those that arise from a mutual intent to promise that has not been expressed in writing or out loud. This category includes both contracts implied in fact and in law. However, contracts implied in law are more accurately described as quasi-contracts since they do not include the requirements of a true contract. Rather, they are used by the courts to rectify unfair situations.

An implied contract follows the below requirements:

  • Is as legally enforceable as express contracts.
  • Depends on an act of substance by the parties involved.
  • Requires circumstances that indicate intent on behalf of both parties to enter a contractual agreement.
  • Does not arise in conflict with either the express declaration of the parties or the law.
  • Exists regardless of assent.
  • Requires a reasonable deduction that intended agreement was implied by facts or actions.
  • Does not exist if harm or inequity would result from its existence.

If an implied contract expires but the parties continue to operate as if it still exists, a new agreement with the same terms is implied. 

Executed and Executory Contracts

If the terms of a contract have been fulfilled and no actions for either party remain, the contract is considered executed. An executed contract no longer exists. If the contract is not complete and at least one of the parties still has duties or obligations to fulfill, the contract is considered executory.

Digital and AI-Driven Legal Contracts

Technology has significantly transformed how legal contracts are created and managed. Digital contracts offer faster execution, secure cloud storage, and real-time collaboration between parties. Many businesses now use AI-assisted contract drafting tools to generate templates, flag potential legal risks, and ensure compliance with applicable laws.

However, while AI can enhance efficiency, it cannot replace human legal expertise. Contracts still require attorney review to ensure they are tailored to specific circumstances and enforceable in the relevant jurisdiction. This combination of technology and human oversight reduces administrative burdens while maintaining legal integrity.

Frequently Asked Questions

  1. What makes a contract legally binding?
    A contract is legally binding if it includes an offer, acceptance, consideration, mutual intent to be bound, and involves competent parties acting for a lawful purpose.
  2. Can an oral contract be enforced?
    Yes, oral contracts can be enforceable, but proving their terms can be challenging. Certain agreements, such as real estate sales, typically must be in writing.
  3. What is the difference between bilateral and unilateral contracts?
    In a bilateral contract, both parties exchange promises. In a unilateral contract, only one party makes a promise, and the other accepts by performing a specific act.
  4. How can technology improve contract management?
    Technology enables digital signing, secure online storage, automated reminders for deadlines, and AI tools that assist in drafting and reviewing agreements.
  5. Why is contract drafting important?
    Clear and thorough drafting prevents misunderstandings, reduces the risk of litigation, and ensures the contract is enforceable in court.

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