Types of contracts | Law Optional Notes for UPSC PDF Download

Introduction

• Contracts play a vital role in various transactions, both in business and personal spheres. A contract essentially represents a legally binding agreement between two or more parties, outlining specific obligations to be fulfilled.
• There are different types of contracts based on their formation, validity, nature, and execution. Understanding these types is crucial for establishing and enforcing legally sound agreements. 

Types of Contracts Based on Formation

Verbal Contracts

• A verbal contract is an agreement made orally without written documentation. While enforceable by law, proving the terms in court can be challenging without a written record.
• Example: When a customer orders a custom-made cake over the phone and agrees to a specific payment, a verbal contract is established. If disputes arise, proving exact terms becomes difficult.
• Provision in India: As per Section 10 of the Indian Contract Act, 1872, verbal agreements meeting contract criteria are legally binding.

Written Contracts

• A written contract is documented and signed by involved parties, offering clarity and reducing disputes due to clearly defined terms.
• Example: When a company hires an employee with a written contract outlining terms like salary and job responsibilities, a written contract is in place.
• Provision in India: Section 2(h) of the Indian Contract Act, 1872, asserts that contracts can be written or oral.

Express Contracts

• In an express contract, terms are explicitly stated, either verbally or in writing, making them legally binding.
• Example: A written agreement between a contractor and a client detailing construction terms exemplifies an express contract.
• Provision in India: Section 9 of the Indian Contract Act, 1872, recognizes express contracts based on explicit agreement to terms.

Implied Contracts

• An implied contract is inferred from parties' actions, not explicit words, making it binding based on conduct.
• Example: A customer selecting and paying for an item in a store forms an implied contract based on actions without verbal agreement.
• Provision in India: Section 9 of the Indian Contract Act, 1872, acknowledges implied contracts from involved parties' conduct.

Quasi-Contracts

• Quasi-contracts are court-created legal agreements in the absence of actual contracts, aiming to prevent unjust enrichment.
• Example: If someone damages property and voluntarily agrees to cover repair costs, a quasi-contract prevents unjust enrichment despite no explicit contract.
• Provision in India: Section 68 of the Indian Contract Act, 1872, addresses quasi-contracts to prevent unjust enrichment.

E-contracts

• E-contracts are formed electronically, like over the internet, email, or electronic signatures, and are legally binding.
• Example: A customer buying a product online agrees to terms displayed on the website, with confirmation emails serving as evidence of the e-contract.

Types of Contracts Based on Validity

Valid Contracts

• A valid contract fulfills all legal requirements like offer, acceptance, consideration, and capacity to contract. It is legally binding and enforceable.
• Example: A person agrees to buy a car from a dealership under a written and signed contract.
• Provision in India: Section 10 of the Indian Contract Act, 1872, states that agreements meeting legal criteria are binding.

Void Contracts

• A void contract lacks legal enforceability from the start, like contracts with illegal objectives.
• Example: A contract for illegal drug purchase is void.
• Provision in India: Section 2(j) of the Indian Contract Act, 1872, deems unenforceable contracts void.

Voidable Contracts

• These contracts are binding, but parties have the option to cancel due to defects.
• Example: Situations where legal defects give a party the right to cancel.
• Provision in India: Section 2(i) of the Indian Contract Act, 1872, allows parties to void certain contracts.

Void-ab-initio Contracts

• Contracts that are illegal and void from inception due to their nature.
• Example: A minor's agreement to buy a car is void ab initio.
• Provision in India: As in Mohri Biwi vs Damodas Das, contracts with minors are void ab initio.

Unenforceable Contracts

• Valid agreements that can't be enforced due to legal reasons like lack of a written agreement.

Illegal Contracts

• Contracts involving illegal acts or against public policy are void and unenforceable.
• Example: Contract to bribe a government official is illegal.
• Provision in India: Section 23 of the Indian Contract Act, 1872, governs illegal contracts.

Types of Contracts Based on Nature

Unilateral Contracts

• A unilateral contract involves one party making a promise in exchange for a specific action from the other party.
• Example: When a company offers a reward for finding a lost item.
• Provision in India: Section 2(f) of the Indian Contract Act, 1872, defines unilateral contracts as those where one party makes a promise for the performance of an act by the other party.

Bilateral Contracts

• In a bilateral contract, both parties commit to specific actions.
• Example: A person buying a car from a dealership at an agreed price.
• Provision in India: Section 2(h) of the Indian Contract Act, 1872, states that bilateral contracts involve promises from both parties to perform specific acts.

Unconscionable Contracts

• An unconscionable contract occurs when one party exploits the weaker position of the other with unfair terms.
• Example: A landlord imposing unreasonable conditions on a tenant.
• Provision in India: While not explicitly defined in the Indian Contract Act, Indian courts acknowledge unconscionability in certain instances.

Adhesion Contracts/Standard Form Contracts

• In adhesion contracts, one party dictates terms, leaving the other with little choice.
• Example: Signing a software agreement without reviewing it.
• Provision in India: Although not outlined in the Indian Contract Act, courts recognize the concept in specific cases.

Aleatory Contracts/Contingent Contracts

• Aleatory contracts hinge on uncertain events for performance by one or both parties.
• Example: Buying an insurance policy for potential future incidents.
• Provision in India: Section 30 of the Indian Contract Act, 1872, addresses aleatory contracts related to uncertain events.

Option Contracts

• Option contracts grant one party the right to buy or sell an asset at a set price within a timeframe.
• Example: Paying for the option to purchase a house within a specific period.
• Provision in India: Recognized under Indian law where contracts create enforceable obligations, granting rights without obligations.

Types of Contracts Based on Execution

Executory Contracts

• An executory contract involves one or both parties who have not yet fulfilled their obligations. The agreement is still in progress.
• Example: Imagine someone agrees to buy a car through installment payments. This contract is executory because the full payment hasn't been made yet.
• Provision in India: As per Section 2(e) of the Indian Contract Act, 1872, an executory contract signifies that the obligations of one or both parties are yet to be completed.

Executed Contracts

• An executed contract denotes a situation where both parties have fulfilled their obligations entirely. The contract is considered finished.
• Example: If a person pays the entire price for a car in a single payment, the contract is executed because both parties have met their obligations.
• Provision in India: According to Section 2(d) of the Indian Contract Act, 1872, an executed contract is one where both parties have completed the terms of the contract.

Conclusion

• Contracts are fundamental legal agreements that underpin various aspects of society, ranging from business transactions to personal arrangements.
• Understanding the nuances of different contract types is crucial for ensuring legal protection and clarity in agreements.