Key Takeaways

  • A contractual agreement is a legally enforceable arrangement between two or more parties that defines rights, duties, and remedies.
  • Contracts can be categorized by formation, consideration, execution, and validity, with subtypes like express, implied, bilateral, unilateral, executed, and voidable contracts.
  • Certain agreements, such as employment, franchise, vendor, rental, and shareholder contracts, are especially common in business and startup contexts.
  • Beyond standard classifications, contractual agreements can also include fixed-price, cost-plus, time-and-materials, and framework agreements, often used in commercial and project management settings.
  • Essential elements of a valid contract include offer, acceptance, consideration, capacity, legality, and mutual consent. Missing these elements can make the agreement void or unenforceable.
  • Promissory estoppel allows a promise to be enforced even without a formal contract if one party reasonably relied on the promise to their detriment.

What are the types of contract available? This is something you need to know if you are planning to enter into a contractual agreement with another individual or business entity. A contract refers to a legally binding promise. A contract is legally enforceable and outlines the rights and obligations of each contracting party.

What Is a Contract?

A contract protects the interests of the parties involved and helps prevent misunderstandings or disputes in the future. Contracts can vary significantly depending on the type of transaction to be performed. Knowing which type of contract is most appropriate for a certain transaction can eliminate any unnecessary hassle and protect your rights more effectively.

Contracts are essential to society because they facilitate trust and cooperation. Instead of depending on the hope of reciprocity or fear of reprisal to get others to fulfill their obligations, people can more effectively enlist others to pursue common purposes by inviting them to enter into contracts backed by unbiased authority.

Without contracts and institutions that support contracts, promises will be more vulnerable to misunderstanding, ill will, forgetfulness, and other human flaws. Contracts enable people who have never met to enter into agreements, such as borrowing or lending money to purchase a home, that they would never otherwise consider making without legal assurance.

Elements of a Contractual Agreement

For a contractual agreement to be valid, certain legal elements must be present:

  • Offer and Acceptance – One party makes an offer, and the other accepts under clear terms.
  • Consideration – Something of value (money, goods, services, or a promise) must be exchanged.
  • Capacity – All parties must have the legal ability to enter into a contract (e.g., of sound mind and legal age).
  • Legality – The agreement’s subject matter must be lawful.
  • Mutual Consent – Both parties must agree voluntarily, free from fraud, coercion, or misrepresentation.

Without these elements, even a signed document may not constitute a legally binding contractual agreement.

What Are the Types of Contract?

According to contract law, there are four types of contracts:

  • Contracts on the basis of formation.
  • Contracts on the basis of the nature of consideration.
  • Contracts on the basis of execution.
  • Contracts on the basis of validity.

Contracts on the Basis of Formation

Contracts on the basis of formation are divided into three groups:

  • Express contracts — Contracts that involve expression or conversation. For instance, A has offered to sell his home, and B has accepted the offer, so it is regarded as an express contract.
  • Implied contracts — Contracts formed without any expression. For example, sitting on a bus is an implied contract between the owner of the bus and the passengers.
  • Quasi-contracts — Contracts that do not have an offer and acceptance, so contractual relations do not exist between the parties involved. A contract that is formed by virtue of law is known as a quasi-contract.

Contracts on the Basis of the Nature of Consideration

There are two types of contracts on the basis of the nature of consideration:

  • Bilateral contracts — Contracts in which considerations are moved in both directions.
  • Unilateral contracts — Contracts in which consideration is moved in only one direction.

Contracts on the Basis of Execution

Contracts on the basis of execution are classified into two groups:

  • Executed contracts — Contracts wherein performance is already completed.
  • Executory contracts — Contracts in which contractual responsibilities are to be completed in the future.

Contracts on the Basis of Validity

Contracts on the basis of validity come in five different forms:

  • Valid contracts — Contracts that are enforceable in courts of law. For a contract to be valid, it must have features such as certainty, free consent, consensus ad idem, two-directional consideration, completion of legal formalities, lawful object, legal obligations, possibility of performance, and capacity of parties.
  • Void contracts — Contracts that are not enforceable in courts of law.
  • Voidable contracts — Contracts that are deficient in free consent, meaning they are formed under certain pressure, which can be physical or mental. For instance, A and B enter into a contract after B forcibly made A sign the contract, and therefore, A has the option to void the contract.
  • Unenforceable contracts — Contracts that are formed without properly fulfilling legal formalities, meaning they suffer from one or more technical defects, such as an insufficient stamp.
  • Illegal contracts — Contracts that are made with unlawful object.

Examples of legal contracts for companies and startups include:

  • Co-founders' agreements.
  • Shareholders' agreements.
  • Employment contracts.
  • Franchise agreements.
  • Vendors' agreements.
  • Service and legal agreements.
  • Rental agreements.
  • Partnership deed drafting.

Common Business Contractual Agreements

While contracts can be classified by formation, consideration, execution, and validity, many industries use more specific contractual agreements tailored to commercial needs, such as:

  • Fixed-Price Agreements – The price is set in advance and does not change regardless of actual costs.
  • Cost-Plus Agreements – The buyer agrees to cover costs plus an additional profit margin.
  • Time and Materials Contracts – Compensation is based on labor hours and materials used, often used in service industries.
  • Framework Agreements – Establish overarching terms for future contracts or repeat transactions.
  • Confidentiality and Non-Disclosure Agreements (NDAs) – Protect sensitive business information from unauthorized disclosure.

These types of agreements help businesses allocate risk, control costs, and establish predictable working relationships.

What Is Promissory Estoppel?

According to the theory of promissory estoppel, one party can count on another party to fulfill his or her promise without the existence of a formal or implied contract. The promise can be evoked when granting the promisor freedom from liability due to a lack of consideration or another contractual element that will result in injustice.

Enforceability and Remedies in Contractual Agreements

If a contractual agreement is breached, remedies may include:

  • Damages – Monetary compensation to cover direct losses or, in some cases, punitive damages.
  • Specific Performance – A court order requiring the breaching party to fulfill their contractual obligations.
  • Rescission – Canceling the agreement and restoring both parties to their pre-contract positions.
  • Reformation – A court-modified agreement correcting mistakes or ambiguities.

The enforceability of these remedies depends on the type of contract and whether it meets all essential legal requirements. In some cases, courts may enforce agreements partially, particularly where fairness and reliance are significant factors.

Frequently Asked Questions

1. What is a contractual agreement?

A contractual agreement is a legally binding arrangement between parties that defines mutual rights, obligations, and remedies.

2. What makes a contractual agreement valid?

It must include offer, acceptance, consideration, capacity, legality, and mutual consent. Without these, the contract may be void or unenforceable.

3. What are the main types of contractual agreements?

They include express, implied, bilateral, unilateral, executed, executory, valid, void, voidable, unenforceable, and illegal contracts.

4. What happens if a contractual agreement is breached?

Possible remedies include damages, rescission, reformation, or specific performance, depending on the nature of the breach.

5. Are verbal agreements legally enforceable?

Yes, in many cases, oral agreements can be binding if they meet the essential contract elements, though written contracts are easier to prove in court.

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