What are the Different Types of Contract?
If you are wondering what are the different types of contract, you're also thinking about the differences in one of the most fundamental aspects of business.3 min read
Contract Types Overview
If you are wondering what are the different types of contract, then you are wondering about the differences between one of the most fundamental aspects of business. A contract is a legally binding agreement between two or more parties in which an exchange of value is made. The contract’s purpose is to set out the terms of the agreement and provide a record of that agreement which may be enforceable in a court of law. Contracts may come in many forms, each with its own use and purpose.
Express and Implied Contracts
An express contract has terms that are stated expressly, or openly, in either writing or orally, at the time of contract formation. These are the kinds of contracts that most people think of when they think of contracts.
Implied contracts, on the other hand, have terms that must be inferred by actions, facts, and circumstances that would indicate a mutual intent to form a contract. Such contracts may be as binding as express contracts, despite their lack of formal agreement, although if a court perceives doubts in minds of the parties as to whether or not a contract existed, it may choose not to enforce such a contract.
Unilateral and Bilateral Contracts
Unilateral contracts involve only one party promising to take an action or provide something of value. These are also known as one-sided contracts, and a common example of them is when a reward is offered for something being found: the party to whom the reward is offered is under no obligation to find the lost item, but if they do find it, the offering party is under contract to provide the reward.
Bilateral contracts, on the other hand, involve both parties agreeing to exchange items or services of value. These are also known as two-sided contracts, and are the kind of contract that is most commonly encountered.
Unconscionable contracts are contracts that are considered unjust by being unfairly weighted to give advantage to one side over the other. Examples of elements that may make a contract unconscionable include:
- A limit on the damages a party may receive for breach of contract.
- A limit on the rights of a party to seek satisfaction in court.
- An inability to have a warranty honored.
Whether or not a contract is unconscionable is a matter left for interpretation by the courts. They usually rule a contract to be unconscionable if it is perceived as being a contract that no mentally able person would sign, that no honest person would offer, or that would undermine the court’s integrity where it was enforced.
An adhesion contract is one that is drafted by a party with a great deal more bargaining power than the other party, meaning that the weaker party may only accept the contract or not. Often called “take it or leave it” contracts, these contracts lack much, if any negotiation, since one party will have little to nothing to negotiate with. Such contracts should not be confused with unconscionable contracts, since a lack of bargaining power does not necessarily mean that the terms set out will be unfair. That said, courts may still not enforce adhesion contracts if they believe a meeting of the minds never existed.
Aleatory contracts are agreements that are not triggered until an outside event occurs. Insurance policies would be examples of this, as they are agreements involving fiscal protection in the face of unpredictable events. In such contracts, both sides assume risks: the insured that they are paying for a service they will never receive, and the insurer that they must pay out potentially more than they receive from the insured.
Option contracts allow a party to enter another contract with another party at a later time. Entering into a second contract is called exercising the option, and a good example of this is in real estate, where a prospective buyer will pay a seller to take a property off the market, then, at a later date, have a new contract made to buy the property outright, should they choose to do so.
Fixed Price Contracts
Fixed price contracts involve a buyer and seller agreeing on a fixed price to be paid for a project. Also known as lump sum contracts, these contracts entail a great deal of risk for the seller, since if the project takes longer or is more extensive than anticipated, they will still only be paid the agreed-upon price.
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