Law > Civil Laws > Indian Contract Act, 1872 > Types of Contracts
A contract is a legally binding agreement between two or more parties in which an exchange of value is made. The purpose of a contract is to form a relationship between two parties who seek to enter into a legal contract and specify their responsibilities and rights according to the contract and to set out the terms of the agreement and provide a record of that agreement which may be enforceable in a court of law. It acts as evidence of details. It Prevents misunderstandings. It ensures safety and confidentiality. It records business relations. In this article, we shall discuss different types of contracts with view of legal obligations.
Types of Contracts on the Basis of Formation:
On the basis of the formation of contract, the types of contracts are as follows:
Express Contract:
An express contract is an agreement with clearly stated terms to which both parties are bound at the time it is formed. This contract may be either oral or written. This contract involves at least two parties making legal obligations to each other to fulfil set/specified parameters. According to the law, they agree to be legally bound by these agreements.
According to the first part of Section 9 of the Indian Contract Act, in so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. This means that if a proposal or a promise is expressed by listing the terms in words – in writing or orally is said to be an Express Contract as long as it gets acceptance from the other party.
Example: A person A sends an email to person B, proposing to sell his car for a cost of Rs. 1,00,000/-. The person B calls the first person and agrees to the terms of the promise. This is express contract involving both written as well as oral contract.
Implied Contract:
An implied contract is a non-verbal and unwritten – yet still legally binding – contract that exists based on the conduct of the parties involved or on a set of circumstances. Implied-in-fact contracts exist when an individual expects to receive a product or service when they arrive at a business that provides it. implied-in-law contracts are not truly contracts. A court may decide that a contract did exist due to the parties’ behaviour, which implied that an agreement existed between them. A court might get involved when one party demands restitution from the other for services or products that were given in exchange for consideration. Implied in Law contracts are also called quasi contracts. They prevent injustice from taking place when one party is enriched in some way at the expense of the other party.
According to the second part of Section 9 of the Indian Contract Act, in so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. A contract in which the terms of the agreement are not expressed in written or oral form is an implied contract.
For example, When we are waiting for a bus to go to a certain place, the bus which can take us to the place where we desire to go arrives and halts at the bus stop. We enter the bus and pay requisite fair. A ticket is given to us. When destination comes the bus halts at the stop and we board down the bus. By entering the bus we accept the offer. In this case everybody is agreeing by the conduct. Thus. there was an implied contract.
Quasi-Contract:
A quasi-contract may be presumed by a court in the absence of a true contract, but not where a contract—either express or implied in fact—covering the same subject matter already exists. Because a quasi-contract is not a true contract, mutual assent is not necessary, and a court may impose an obligation without regard to the intent of the parties. When a party sues for damages under a quasi-contract, the remedy is typically restitution or recovery or fair resolution of the situation under a theory of quantum merit which means “as much as is deserved.”. Liability is determined on a case-by-case basis.
Example: A classic quasi contract circumstance may be created by the delivery of a pizza to the wrong address—that is, not to the person who paid for it. If the individual at the incorrect address fails to fess to the error and instead keeps the pizza, they could be seen as having accepted the food, and thus be obliged to pay for it. A court could then rule to issue a quasi contract that requires the pizza recipient to pay back the cost of the food to the party who purchased it or to the pizzeria if it subsequently delivered a second pie to the purchaser.
E-Contract:
An e-contract is a contract where the offer and acceptance, and consideration etc., are done by electronic means. An E-contract is also a valid form of contract but there is just one important factor involved is that the E-contracts come into force with the help of the Internet or digital mode of communication. The electronic means and devices may include emails, tests, telephones, digital signatures etc. They are also known as the Cyber contracts, the EDI contracts or the Electronic Data Interchange contracts. The terms of the contract are listed by electronic means or implied by the actions of the users.
Types of Contracts on the Basis of Form:
On the basis of the form of contract, the types of contracts are as follows:
Written Contract:
A written contract generally refers to a written document outlining an agreement between two parties. Written contracts provide more certainty for both parties than verbal contracts. They clearly set out the details of what was agreed. When a contract is not in writing, parties are exposed to a number of risks.
To ensure written contracts are enforceable, It should contain following information:
- The basic terms and conditions of the agreement, agreed upon by all involved parties
- The names and contact information of all the parties to be involved in the execution of the contract
- Clearly spelling out the duties to be fulfilled and any payment involved
Advantages of a written contract:
- It provides proof of what was agreed between the parties and serves as a record of the agreement.
- It clears status and part of performance of each party in the contract.
- It helps in preventing misunderstandings or disputes by making the agreement clear from the outset
- It reduces the risk of a dispute by detailing payments, time frames and work to be performed under the contract Thus it provides security and peace of mind.
- It sets out how a dispute over payments or services provided will be resolved and how the contract can be varied
- It specifies how either party can end the contract before the work is completed.
The Indian Contract Act does not require every contract to be in writing. If a contract is to be in writing as required by the provisions of any other law, then it must also be in writing.
For example, as per the Companies Act, the memorandum and the Articles of Association must be in written form, then the contract law also insists it in a written form only. Similarly, by the Transfer of Property Act, all the documents like sale-deeds, leases, mortgage deeds must be in writing then the contract law also insists them in a written form only. If by the Indian Registration Act, registration of documents is required then the contract law also insists that such requirements should be observed. Acknowledgement to save the law of limitation is also required to be in writing by Sec. 18 of the Limitation Act, 1963. Submissions under the Arbitration Act are similarly required to be in writing.
Handwritten changes or additions to a printed contract are part of the contract, as long as both / all parties to the contract agree to the changes/additions. The agreement is demonstrated by placing their initials and date of acceptance to changes next to the handwritten changes, each person placing their initials is signifying they have read the handwritten portion and are agreeing to it a part of the contract, just like the parts which are printed. Not putting initials next to a written change in a contract can lead to one party attempting to say they never agreed to those terms which would likely lead to litigation. Court has shown a view that the handwritten words reflect the real and immediate intention of the parties.
In W & K Holdings (NSW) Pty Ltd v. Mayo [2013] NSWSC 1063 case, the Supreme Court of New South Wales rectified a lease contract (made by the plaintiff and the defendant themselves without hiring a lawyer) on the basis that there were inconsistencies between the printed terms of a template lease and the handwritten terms. The Supreme Court, in this case, gave more weight to the hand-written provisions in the contract. The court held that more weight should be given to the hand-written components as these required the particular attention of the drafter similarly they required the parties to put their mind to a provision. Court further added that the conflicts may be avoided entirely. To avoid unnecessary issues and conflicts, let the lawyer prepare the contract for the parties in a clash of interpretation. They have the knowledge, skills and expertise to create a contract that will embody the real intention of parties, can protect your interests. The expense of a paying a lawyer to look over and draft every contract initially seem massive, however, that expense is often small compared to the cost of litigation.
In Robertson v. French, (1803) 4 East 130 case. the Court held that Where there is conflict between the printed and written clauses of a policy, greater consideration will be paid to the written clauses.
Verbal or Oral Contract:
Many contracting arrangements use verbal contracts, which only work well if there are no disputes. A handshake agreement may still be a contract and may (though often with difficulty) be enforced by a court. However, verbal contracts can lead to uncertainty about each party’s rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do.
In Nanak Builders and Investors Pvt. Ltd. v. Vinod Kumar Alag, AIR 1993 Delhi 315 case, the Delhi High Court observed that an oral agreement might be a legitimate and enforceable contract. As a result, a contract does not have to be in writing in the literal sense unless it is required by law or the parties deliberately intend to reduce the terms of the agreement to writing.
Part Verbal Part Written Contract:
Some agreements may be only partly verbal. For example, there may be supporting paperwork such as a quote or a list of specifications that also forms part of the contract. Examples of paperwork that may support a verbal contract:
- emails
- quotes with relevant details
- lists of specifications and materials
- notes about pre-discussion.
Standard Form Contract:
Standard form of contract is generally the terms and conditions of the contract that are pre-drafted by one of the party and the other party is supposed to sign it, without having any time or opportunity to get the terms changed. They are also known as boilerplate contracts or contracts of adhesion or “Take it or leave it” contracts. They are intended to make common agreements between suppliers and consumers more efficient and less costly. Standard contracts are frequently used in situations where vendors and consumers routinely participate in legally and technically complex transactions. In this form the most of the terms of the are set in advance and there is little or no negotiation between the parties occurs. Often, these are printed with a few blank spaces for filling in information such as names, dates and signatures. They tend to be one-sided documents that mostly benefit the person who prepared the contract. Thus, it is often a contract that is entered into between unequal bargaining partners.
Indian contract system does not have any specific differentiation between SFC and general contract, as the SFC is a kind of contract which is govern by the laws provided for general contracts in Indian contract Act 1872.
Examples of Standard Form Contracts:
An insurance company may prepare a draft of insurance policy, which may form the basis of a contract with a large number of insured persons.
The railway authorities may print various terms and conditions in the Time Table, which may be deemed to be the basis of the contract with thousands of passengers who may be travelling by rail every day.
Advantages of Standard Form Contract:
- It reduces the cost of contracting by eliminating the need for custom contracts for individual tenders.
- It eliminates the scope for negotiation, and thus, speeds up the bidding process.
- It uses the same terms every time a contract is formed. Thus, it brings uniformity in the industry that is it makes it easy for people to become familiar with the terms of standard contracts of their industry.
- It legalizes transaction and helps in building trust.
- Consistency in contracts means less room for deviation from the terms set out in the contract. It prevents employers from making any changes to the contract without informing their clients.
Disadvantages of Standard Form Contract:
Boilerplate usually is found at the end of a contract. This is standardized language that most contracts have. Many people do not even read this section, considering it to be jargon. The problem is not usually what the boilerplate puts in but what it leaves out. For example, if the person issuing the contract has deleted the part that says the loser in litigation will pay the winner’s attorney fees, you could find yourself at a disadvantage even if you win a dispute. Another example of problems with boilerplate is the section that says disputes will be resolved by arbitration instead of a lawsuit. If you want to reserve the right to sue
Why people accept standard form of contract?
- It works on take it or leave it concept, hence there is no room for negotiation and saved all the time for both the parties and speed up the process to enter into the contract.
- It’s the most cost effective option. There is no need to address each individual and draft a contract separately.
- After a while, people gets familiar with the format as the terms are same every time when a contract is made. This brings consistency and builds faith among customers and reduces the scope of deviation.
Types of Contracts on the Basis of Validity and Enforceability:
On the basis of validity and enforceability of contract, the types of contracts are as follows:
Valid Contracts:
A valid contract is a written or expressed agreement between two parties to provide a product or service. The Indian Contract Act, 1872 itself defines and lists the Essentials of a Contract either directly or through interpretation through various judgments of the Indian judiciary. Section 10 of the contract Act enumerates certain points that are essential for valid contracts.
An agreement is a contract if satisfies all the following criteria
- The agreement should be by the free consent (coercion, undue influence, misrepresentation, mistake or fraud) (section 13 to 22)
- The parties involved in the contract are competent. (Section 11 and 12)
- The agreement is for a lawful consideration and a lawful object. (Section 23 to 25)
- It is not an agreement expressly declared to be void. Social, moral and religious agreements are void w.r.t. contract. (Section 26 to 30)
- The agreement should be legally enforceable.
If any of this condition is not satisfied it is a void agreement and not a contract.
Void Contracts:
The section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not enforceable by a court of law as void. A contract is an agreement which is enforceable by law. Hence, we use word contract it satisfies all legal requirement. Hence the word “Void contract” is wrong. It should be “void agreement”. Thus, contracts can only be valid or voidable. A void contract is missing an element. In this case, the contract does not have to be terminated in court. It simply does not have to be executed, and both parties can walk away.
When we were studying valid contracts, we have seen ingredients of valid agreement. If any one of these ingredients is missing the agreement is void agreement. Contract involving minor void ab initio. A valid contract may become void contract by change in government policy.
Example: A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A dies of natural causes in 4 years. The contract is no longer valid and becomes void due to the non-enforceability of the agreed terms.
Voidable Contracts:
These types of Contracts are defined in section 2(i) of the Act: “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. The decision to enforce the contract is between the parties. In a voidable contract, one of the parties is legally bound to honour the contract. So, a voidable contract can be executed, even though there is an element missing, if the party not legally bound agrees to move forward. A voidable contract is regarded as legal and enforceable from the beginning, but it can be rejected by either party if its terms are found to be defective.
In fact, there are several ways a contract may be voidable:
- One or both of the parties wish to terminate the contract because an element was not present
- One of the parties was coerced into the contract
a voidable contract may become enforceable once any underlying contractual defects have been rectified. Nullification can occur for the same reasons as void contracts as well as voidable contracts.
Illegal contracts:
An illegal contract is an agreement that violates the law because its fulfillment requires the parties to engage in illegal activity. Such a contract is void ab initio and unenforceable. Thus, if the contract is breached, neither party will be entitled to any compensation or held liable. It is important to note that a contract can be illegal without violating the law. For example, this can occur when a contract deals with certain activities, like gambling or prostitution, that are not explicitly prohibited by law but are discouraged due to violation of public policy. Due to the criminal aspects of the illegal contracts, they are punishable under law. All the parties that are found to have agreed on an illegal promise are prosecuted in a court of law.
Unenforceable contract
An unenforceable contract is a written or oral agreement that will not be enforced by courts. Contracts may be unenforceable because of their subject matter, because one party to the agreement unfairly took advantage of the other party, or because there is not enough proof of the agreement. Lack of capacity, duress or undue influence, deception, nondisclosure, unconscionability, public policy, error, and impossibility are all characteristics of unenforceable contracts.
Conclusion:
Whatever may be the type of contracts. It should have all the ingredients of valid contract. According to the act, the contract is “an agreement enforceable by law.” According to the Indian Contract Act 1872, “Agreements are also contracts made by the consent of parties, competent to contract to consider with a lawful object and are not hereby expressly declared to be void”. Agreement must be free from coercion, undue influence, misrepresentation, mistake or fraud and it is made between parties competent to contract.