A contract simply refers to an agreement between two parties to initiate a legally-enforceable obligation to perform, or refrain from performing a certain task. It can relate to almost any kind of transaction, including a sale, service, transfer of property ownership, or a combination of different kinds of transactions.
Note that parties entering into a contract may be individuals, business organizations, or government agencies. A contract may also involve more than two people. In most situations, only parties who enter into a contract have duties and rights under the contract.
The primary function of a contract is to establish a legal relationship between two parties who wish to enter into an agreement and specify their obligations and rights in accordance with the agreement. Contracting parties are obligated by law to fulfill the terms stated in the contract, even if the contract seems to be a bad bargain or improvident, as long as it is not fraudulent or does not result from undue influence or duress.
Have it in mind that a contract is legally enforceable if one party fails to do what he or she has promised to do, the other can ask the courts to enforce the agreement or award damages for injury sustained because the contract has been breached—because a promise made under the contract hasn’t been kept or an act hasn’t been performed.
Contracts can be anything from simple handshake deals to perform certain tasks to formal written documents. They can be written or oral agreements that can or cannot be witnessed, signed or sealed. Traditionally, contracts were considered as legally enforceable if they were only sealed. Today, the courts recognize different types of contracts in business law, such as implied contracts.
Different Types of Contracts in Business Law
Different kinds of contracts in business law are used for different types of business agreements. Business contracts are leveraged to obligate the parties involved to fulfil their contractual duties by exposing them to the risk of legal consequences in the event of a contract breach.
Note that contracts can come in varying forms to suit different situations, needs, and purposes. They can be categorized based on how they are formed, what kind of consideration is being offered, how they will be executed, and whether or not they are valid. Here are the major types of contracts in business law.
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Contracts Based on Formation
Contracts based on formation can be categorized into three groups: express contracts, implied contracts, and quasi contracts.
- Express Contracts- They result from conversations or expressions.
- Implied Contracts – They occur without conversations or expressions. They can be implied in law or fact. True implied contracts arise from mutual agreements that haven’t been expressed in words.
- Quasi Contracts- Also known as implied-in-law contracts, these types of business contracts exist regardless of consent by either party.
Contracts Based on Validity
Contracts based on validity can come in five different forms, including valid contracts, void contracts, voidable contracts, illegal contracts, and unenforceable contracts.
- Void Contracts – They don’t impose any obligations on the contracting parties, and they are unenforceable.
- Valid Contracts – They are legally enforceable.
- Voidable Contracts- These are the types of business contracts established under mental or physical pressure. They might become void or valid business contracts at a future date.
- Illegal Contracts- These types of contracts have unlawful objects. For instance, a contract may be considered illegal if it involves the sale and delivery of illegal narcotics.
- Unenforceable Contract: This is a contract that has not fulfilled certain legal formalities.
Contracts Based on Execution
Contracts based on execution can either be executed contracts or executory contracts. An executed contract is a contract in which performance is already completed. To a certain extent, the term is a misnomer since a contract no longer exists once the parties involved have fulfilled their obligations. An executory contract simply refers to a contract that obligates the participating parties to perform their obligations in the future.
Contracts Based on the Nature of Consideration
There are two types of contracts based on the nature of consideration: unilateral and bilateral contracts.
- Bilateral Contract: Also known as two-sided contracts, bilateral contract involves contracting parties who promise not to perform or perform certain acts.
- Unilateral Contracts: Also known as one-sided contracts, these types of business contracts are established with the acceptance of an offer. An example is where one offers a reward if someone finds their lost possession. The person offered the reward doesn’t have to find the lost item belonging to the one offering the reward.
Other Types of Contracts in Business Law
This type of contracts allows a contracting party to enter to a different contract with a different party at a time that is not specified. An example of an option contract is where a seller is paid by a buyer to take their property off the market, after which a new contract to buy the property is made if the buyer chooses to purchase the property.
This is also referred to as “take it or leave it” contracts, adhesion contracts are drafted by parties with more bargaining powers. Weaker parties have no say. They may only decide to accept or reject the contract. These contracts leave one of the parties in a position where they have little or no negotiation powers.
These contracts tend to include agreements that aren’t triggered until certain events occur. A good example is an insurance policy. Insurance policies require a buyer paying premiums and the buyer promising to pay the insured good, say a car, in case it is involved in an accident. As you can see, the insured or the buyer pays for a service that he or she will never receive, and the insurers or sellers have to pay possibly more than the amount of premiums they received from the insured.
Lump-Sum or Fixed Price Contracts
Note that in these types of contracts, the sellers and the buyers agree on fixed prices to be paid for projects. These contracts put the sellers at significant risks since if the projects become more expensive than projected or if they take longer to complete, the sellers will still be paid the amount that was initially agreed upon.
Note that different types of contracts in business law serve the purpose of establishing legal relationships between parties entering into agreements. They explicitly state the rights and obligations of each party according to their agreement. Contracting parties are obligated by the law to do their part, as stated in their contract, as long as the contract did not result from duress or undue influence.