Types of Contracts: Best Practices and Examples

Overview : A Contract is a legally binding agreement executed between two or more parties that creates obligations to be fulfilled mutually. Contracts are created when parties agree to execute/perform or not perform specific duties. Learn about different types of contracts, their classification, nature and enforceability.

A comprehensive understanding of different types of contracts in business/employment or tenancy is key to ensure clarity and avoiding any further undesirable conditions. This article covers various contracts and types of contracts, their features and uses. In-depth understanding of different contracts can be helpful in preventing any act of fraud.

What is a Contract?

A contract generally, is a legally binding agreement between two or more parties that particularly deals with employment, sales or tenancy. The Indian Contract Act of 1872, a contract is defined as any agreement which can be enforced by law. In simple words, a contract is a promise or promises that can be enforceable by the law.

Essential elements of a contract are offer, acceptance and mutual consent among the parties involved. These elements ensure the agreement is clear, intentional and agreed upon by all parties involved, thus, creating legal obligations.

Contracts involve various promises for consideration between parties. An agreement must comply with the legal framework to be considered a contract. This enforceability is what differentiates a casual agreement from a binding contract and provides a basis for legal recourse if one party fails to fulfill its commitments.

A contract is classified on the basis of some aspects that go as;

• Formation
• Execution
• Nature of Consideration
• Validity

On Basis of Formation

Contracts can be classified based on formation into four types of contract: Express, Implied, Quasi and e-Contracts. These categories will explain how a contract is formed and its enforceability. Each type has its unique characteristics that affect how legal obligations are interpreted and enforced.

• Express Contracts
  Express contracts are clearly stated agreements communicated through words that may be either in written or verbal form. Clarity of express contract ensures both parties understand their commitments. Example: A contractor building a house for a fixed price with clearly stated terms is an express contract.
• Implied Contracts
  Implied contracts are formed through actions or conduct rather than explicit language. Therefore, you can say that they are in stark contrast to express contracts. These contracts rely on circumstances and mutual understanding inferred from parties’ actions, creating an implied contract based on their behavior. For instance, a doctor treating a patient without an explicit agreement, governed under Section 9 of Indian Contract Act, 1872.
• Quasi contracts are legal obligations created by law to prevent unjust enrichment without mutual consent. They are based on principles of equity and fairness, often arise in situations where one party benefits at the expense of another. Unlike other contracts, these contracts hold no contractual relations between the partners but are formed by virtue of law. The court may form a Quasi-Contract under certain circumstances, which are described below;
  • On Supply of Essentials
  • Where one party gains by the activity/actions of another
  • When expenses of one person are met by another
  • On payments/supply of goods by mistake
  • In the case of lost tools' finder
  Example: If someone mistakenly acquires goods, they must return them or provide restitution.
• E-Contracts
  E-contracts are agreements made electronically via emails, websites or digital platforms. In other words, such contracts (Electronic, Cyber/Electronic Data Interchange Contracts) are formed by electronic means. Examples of e-contracts include online shopping, service subscriptions, and digital agreements, the terms of which are either explicitly listed or implied by user actions. The convenience and widespread use of e-contracts highlight the importance of understanding their legal implications in the digital age.

On the Basis of Validity

Contracts are also classified based on their legal validity and enforceability; those contracts are Valid, Void, Voidable, Illegal and Unenforceable contracts. These classifications ensure that entered contracts are legally sound and enforceable.

• Valid Contracts
  Adherence to essential components like mutual consent and consideration is required in case of valid contracts. They must satisfy all legal requirements to be considered binding. The contract requirements that must be satisfied are as follows;
  • Making of Offer and its Acceptance, fulfilling eligibility for registration
  • Existence of Lawful Consideration and Object
  • Existence of a legal relationship
  • Parties concerned are competent to form a Contract
  • Certainty in terms of contract
  • Free consent of the parties
  • Capability of Performance of the Contract
  If one party fails to fulfil its obligations under a valid contract, the other party can seek legal remedies. This enforceability is what makes valid contracts the foundation of legal and business transactions.
• Void Contracts
  Void contracts are those that cannot be enforced due to missing essential elements or illegal contracts. These contracts are unenforceable by law and have no legal effect, thus null from the beginning. Simply put, any contract that doesn't fulfill requirements mentioned for valid contracts, can be classified as void contracts. Example: Any Agreement (s) involving illegal acts or public policy violation.
• Voidable Contracts
  Voidable contracts are initially valid but can be voided due to issues like fraud or duress. A voidable contract remains valid and enforceable until one party decides to void the contract. In other words, a contract is considered as voidable when there is existence of an agreement which is enforceable by law in case of one or more of the parties concerned, but not at the option of the others.
• Illegal Contract
  A contract is said to be illegal by the court in the conditions when;
  • It allows one or all involved parties to break the law or not comply with society norms.
  • It opposes public policy.
  All illegal contracts can be void/voidable/valid, but they can't be vice-versa.
• Unenforceable Contracts
  Unenforceable contracts are considered valid but cannot be enforced due to some technicalities like missing signatures or improper documentation. These limitations prevent parties from seeking legal remedy, though the unenforceable contract is legally sound otherwise.

On the Basis of Execution

Contracts can be categorized based on the execution/performance and obligations of the parties into Executed and Executory Contracts. This classification helps in understanding the status of obligations and responsibilities.

• Executed Contracts
  Executed contracts are those where the stipulated performance is completed by one or more parties. These contracts are complete when all parties have fulfilled their obligations, making them fully performed.
• Executory Contracts
  Executory contracts involve commitments to be performed at a future date and can be executed instantaneously. With unfulfilled obligations and future commitments, these executory contracts are partly or fully executory.

On the Basis of Consideration

Contracts can also be classified on the basis of nature of promises involved in Unilateral and bilateral contracts. This classification helps in understanding the dynamics of obligations and promises between the parties.

• Unilateral Contracts
  Unilateral contracts are those where one party makes a promise contingent on another’s performance. For example, Reward for finding lost property. This encourages individuals to return lost items. These contracts are binding only when the required act is completed/fulfilled, thus making the promise legally binding and enforceable.
• Bilateral Contracts
  Bilateral contracts involve mutual promises from one or both parties, creating reciprocal obligations. Simply put, a contract is considered as bilateral where there are mutual considerations involved in any contract. This contract comes into effect when both parties agree to the contractual terms of each other.

Why is it important to understand different types of contracts?

Understanding different contract types is vital for business scenarios so you have the right legal framework. Different contracts outline the responsibilities and expectations of all parties involved, and that affects the success and efficiency of business transactions. For example, knowing when to use a fixed-price contract versus a cost-reimbursement contract can impact project budgeting and financial predictability.

Moreover, having a good understanding of various contract forms helps in risk management by enabling parties to foresee potential legal implications. This knowledge helps in negotiating terms that align with operational needs, thus giving you an edge in business dealings.

Master various contract types, and you can create strong agreements, minimize disputes, and manage overall contracts.

Conclusion

In conclusion, contracts are the backbone of all legal and business transactions, governing a wide range of agreements from sales and services to leases and employment. Knowing the different classifications—by formation, validity, performance, consideration, purpose, payment structure and nature—ensures contracts are clear, legally enforceable and compliant with legal requirements. Whether it’s express, implied or e-contracts, understanding the nuances of each type helps in drafting effective agreements. Having comprehensive knowledge of contract types not only gives you legal protection but also better risk management and negotiation strategies for smoother business operations.

Author Bio

Editorial Team | in

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.