Contracts are an integral part of everyday transactions. Contracts ensure clarity and legal enforceability from grocery purchases to large business deals. All contracts in India are covered by the Indian Contract Act, 1872. Below, we explore different types of contracts and relevant provisions under this Act.
What is a Contract?
A contract is a legal agreement between two or more parties, which creates rights and obligations between them. Under the Indian Contract Act of 1872, it must contain the elements of an offer, acceptance, consideration, free consent, a lawful object, and competent parties to be valid. The contract may be written, verbal, or implied. Contracts guarantee clarity, trust, and enforceability by providing legal remedies in the event of breach or non-performance by any party to the contract.
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1. Based on Formation
This categorization pertains to the manner of contract formation. It analyses whether they are expressively mentioned, inferred from action, or enacted by law. Contracts can be categorized as a result of how they are formed:
a. Express Contracts
Express contracts are clearly stated agreements. They are communicated through written or verbal terms. Both parties explicitly agree to the contract's terms. These contracts remove ambiguity in obligations.
Illustration: A written contract for the sale of a car.
b. Implied Contracts
Implied contracts are formed through actions or conduct. They are not explicitly written or spoken. The intent is inferred from the circumstances. Implied contracts rely on mutual understanding.
Illustration: A passenger boarding a bus presumes an acceptance to pay the fare.
c. Quasi-Contracts
Quasi-contracts are legal obligations created by law. They prevent one party from unjustly benefiting. These are not actual contracts with mutual consent. They arise in situations of fairness and equity.
Illustration: A person acquiring goods by mistake should return the goods or make restitution of their value.
Applicable Provisions: Sections 68 to 72 pertain to quasi-contractual obligations.
d. E-Contracts
E-contracts are agreements made electronically. They are formed via emails, websites, or digital platforms. E-contracts follow the Indian Contract Act principles. They ensure legal enforceability in the digital age. E-contracts provides legal recognition for electronic records and digital signatures.
Examples include online shopping and service subscriptions.
Sections 4 and 5 of the Information Technology Act, 2000 (IT Act) validate contracts formed electronically.
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2. Grounded on Validity/ Enforceability
This category assesses the legality of a contract, whether it is enforceable under the law, void, voidable, illegal, or unenforceable, depending on whether or not it follows legal principles.
Contracts can be classified based on their legality:
a. Valid Contract
Valid contracts are enforceable by law. They fulfil all essential legal requirements. Free consent and lawful objects are necessary. It must have lawful consideration. Competent parties are required for valid contracts.
Example: A lease contract that follows all elements for a valid contract.
Section 10 of the Indian Contract Act mentions criteria for a valid contract.
b. Void Contract
Void contracts are unenforceable by law. They lack essential legal validity. Such contracts hold no legal obligations. A contract for illegal goods becomes void.
Example: A contract to sell goods after a ban is imposed on those goods.
Relevant Provision: Section 2(g) of the Indian Contract Act defines them.
c. Voidable Contract
Voidable contracts are enforceable at one party's discretion. They remain valid until voided by the aggrieved party. Coercion or fraud often makes contracts voidable. Voidable contracts protect parties from unfair agreements.
Example: A contract entered into under coercion can be voided by the aggrieved party.
Relevant Provision: Section 2(i) of the Indian Contract Act governs them.
Checkout the Differences Between Void & Voidable Contract
d. Illegal Contract
Illegal contracts are prohibited by law. They involve unlawful or immoral objectives. Such contracts are void from inception. No legal rights arise from illegal contracts.
Example: A contract for the sale of illegal drugs.
Section 23 of the Indian Contract Act governs them.
e. Unenforceable Contract
Unenforceable contracts cannot be enforced by law. They lack essential legal formalities or evidence. Defects like improper documentation make them unenforceable. They are valid but not actionable in court.
Examples include unsigned agreements or unstamped contracts.
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3. Depending on the Performance/Execution
This classification refers to the performance stage of contractual obligations. It determines if the contract has been wholly performed, is still on, or partially performed.
Contracts can also be classified according to their performance:
a. Executed Contracts
Executed contracts are fully performed by all parties. All obligations of the contracts are completed. These contracts leave no pending responsibilities. A completed sale is an executed contract. They signify the fulfilment of mutual promises. Legal enforceability ends after execution.
Examples include delivered goods with payment made.
b. Executory Contracts
Executory contracts have unfulfilled obligations. At least one party has yet to perform their part. These contracts are ongoing agreements. A promise to deliver goods next month is executory. They often involve future commitments.
Example: A contract for future delivery of goods.
c. Partly Executed and Partly Executory Contracts
Partly executed and partly executory contracts involve partial performance. One party has fulfilled their obligation. The other party's obligation remains pending. They represent incomplete but ongoing agreements. Legal enforcement applies to unfulfilled terms. They balance performed and pending obligations. Such contracts ensure accountability during the execution
Examples include advance payment for undelivered goods.
d. Unilateral Contracts
Unilateral contracts involve a promise by one party. The other party performs an act in response. They are one-sided agreements. A reward for finding lost property is an example. Legal obligations arise only after the act is performed. They do not involve mutual promises. The promisor sets conditions for the contract.
Example: Unilateral contracts are common in reward-based offers.
e. Bilateral Contracts
Bilateral contracts involve promises from both parties. Each party has reciprocal obligations. They are the most common type of contract. Both parties are legally bound to fulfill their promises. They ensure mutual trust in agreements. Bilateral contracts promote balanced obligations.
Example: A sales agreement is a bilateral contract.
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4. Based on Nature of Consideration
This classification analyses whether the promises are exchanged between two parties or not. Based on the nature of the consideration, it further categorises the obligation as unilateral or bilateral.
a. One-way Contracts
One-way contracts involve promises by only one party. The other party performs an act in return. They are also called unilateral contracts. A reward for finding lost property is an example. No mutual exchange of promises occurs. They rely on voluntary actions by one party. One-way contracts are common in rewards or offers.
For example Reward for getting lost item
b. Mutual Contracts
Mutual contracts involve promises from both parties. They are also called bilateral contracts. Each party has reciprocal obligations. A sales agreement is a mutual contract. Both parties commit to fulfilling agreed terms. They ensure balanced obligations and rights. Mutual contracts are the most common type. Legal enforceability applies to all terms. They promote trust and cooperation between parties.
Example: A sale of goods contract in which one party promises delivery and the other promises payment.
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5. Based on Purpose
This classification focuses on a specific objective that a contract aims to achieve. This highlights the roles and responsibilities tailored to meet distinct purposes like indemnity, guarantee, bailment, pledge, or agency.
a. Contracts of Indemnity
Contracts of indemnity promise compensation for losses. One party protects another against specific damages. They ensure financial security in uncertain events. Such contracts mitigate financial liabilities. They promote trust in risk-sharing agreements. Legal enforceability ensures fairness in loss coverage.
Example: Insurance contract.
Section 124 of the Indian Contract Act governs them.
b. Contracts of Guarantee
A contract of three parties in which one person promises to fulfil the obligation of the other in case of failure to perform. The principal debtor is primarily responsible. The guarantor steps in if the debtor defaults. Such contracts enhance trust in financial dealings. They provide security for loans or credit.
Example: A bank guarantee.
Section 126 of the Indian Contract Act governs them.
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c. Contracts of Bailment
Contracts of bailment involve transferring goods for a purpose. The owner delivers goods to another party temporarily. The bailee must return or dispose of goods as agreed.
Example: Leaving clothes for dry cleaning.
Sections 148–171 of the Indian Contract Act govern them.
d. Contracts of Pledge
Contracts of pledge involve goods given as security. The pledgor delivers goods to the pledgee. They secure repayment of loans or obligations. Ownership stays with the pledgor and possession transfers. The pledgee must safeguard the pledged goods. The pledgor can reclaim goods after fulfilling obligations.
Example: Pawning jewellery for a loan.
Sections 172–181 of the Indian Contract Act govern them.
e. Contracts of Agency
Contracts of agency involve one party acting on another’s behalf. The principal authorizes the agent to represent them. Agents perform tasks within the defined authority. The principal bears the agent’s actions legally.
Example: Hiring a lawyer to represent a case.
Relevant Provisions: Sections 182 to 238.
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6. Other Types of Contracts
a. Option Contracts
Options contracts grant the right to buy or sell something later. The buyer pays a premium for this right. They involve no obligation to execute. These contracts limit risk for the buyer. Only the seller is legally bound to perform. Options contracts are widely used in financial markets. They ensure flexibility in uncertain conditions. Courts enforce them based on agreed terms. They must specify time limits and conditions.
Example: Stock options
b. Adhesion Contracts
Adhesion contracts are standard-form agreements. One party drafts terms, leaving no negotiation room. They are common in insurance or service agreements. The weaker party must accept or reject entirely. These contracts often favor the drafter. Legal validity depends on fairness and clarity. Courts may strike unfair terms in adhesion contracts. They simplify agreements for repetitive transactions. Adhesion contracts must comply with consumer protection laws.
Examples include phone plans or car rentals.
c. Aleatory Contracts
Aleatory contracts depend on uncertain future events. Performance occurs only if specified events happen. These contracts balance risk and benefit. Both parties face conditional obligations. Section 124 governs indemnity-based aleatory contracts. They are widely used in risk management. Parties must clearly define triggering events. Courts enforce them only for lawful contingencies. Aleatory contracts mitigate unforeseen financial losses.
Insurance agreements are classic examples.
d. Lump Sum Contracts
Lump sum contracts specify a fixed payment for work. Contractors receive one payment for the entire project. They simplify cost management for clients. Any cost overruns are the contractor’s responsibility. Lump sum contracts reduce disputes over payments. Parties must agree on scope and deliverables. These contracts benefit when the project scope is clear. Courts enforce them based on agreed lump sums. Transparency in terms ensures fair execution.
They are common in construction projects
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Essentials of a Valid Contract
Understanding the essentials of a valid contract is crucial to ensure its enforceability and prevent disputes. These elements establish the foundation of trust and legality in any agreement. For a contract to be enforceable, it must fulfil the given criteria under Section 10 of the Indian Contract Act 1872:
Free Consent: Both must agree voluntarily.
Lawful Object: The purpose need not be illegal or immoral.
Consideration: Sufficient consideration must take place.
Competent Parties: Parties must be of legal age, sound mind, and not disqualified by law.
Legal Formalities: Agreements must comply with those legal formalities that apply to the contract, including stamping or registration
Importance of Contracts in Business Law
Contracts are the backbone of business law, providing legal enforceability, clarity, and accountability in commercial transactions. They play a vital role in establishing trust, protecting rights, and reducing risks in agreements between parties. Here are some of the key reasons why contracts are important in business law:
Legal Enforceability: Contracts provide a legal framework that ensures all parties fulfill their obligations. This prevents businesses from breaches and disputes.
Clarity and Precision: The written contracts clearly stipulate terms, responsibilities, and expectations that minimize misunderstandings and ambiguity.
Risk Mitigation: Contracts help mitigate risks as they specify remedies for non-performance or delays that ensure financial security.
Dispute Resolution: Contracts offer legal remedies in the resolution of disputes, ensuring that the interests of parties involved are protected in case of a dispute.
Business Continuity: Contracts ensure smooth operations through long-term agreements, making the relationship with partners and vendors more reliable.
Regulatory Compliance: Contracts ensure that the business activities are in compliance with laws and regulations; hence, the risk of legal penalties is reduced.
Trust and Accountability: The contracts formalize mutual trust and ensure accountability; hence, they are indispensable for healthy business relationships.
Also, Find out the Important Types of Breach of Contracts
Summing Up
In a nutshell, knowing the different kinds of contracts under the Indian Contract Act, 1872, is vital for just and legally enforceable agreements. Contracts are the backbone that helps to establish clarity, enforceability, and trust in both personal and business transactions. If all the legal principles are followed and all the necessary elements are fulfilled, contracts safeguard the rights of the parties involved and minimize disputes. Whether traditional or digital, contracts still form the backbone of modern commerce, fostering accountability and smooth operations in diverse scenarios.
Types of Contract: FAQs
Q1. What is a contract under the Indian Contract Act?
A contract is a legally enforceable agreement between two or more parties.
Q2. What regulates contracts in India?
The Indian Contract Act, 1872, governs contracts in India.
Q3. What are the essentials of a valid contract?
Free consent, lawful object, consideration, competent parties, and legal formalities.
Q4. What happens if a contract is breached?
The aggrieved party can seek legal remedies like compensation or enforcement.
Q5. What is the difference between void and voidable contracts?
Void contracts are unenforceable by law, while voidable contracts can be cancelled by one party.