What are the different Types Of Contracts?

A contract is an agreement that sets a binding obligation on two or more parties. By law, a contract is obligatory.

The Indian Contract Act, 1872, governs the rules of a contract in India.

According to Section 2(h) of the Indian Contract Act 1872, ‘an agreement enforceable by law is a contract’.

Table of Contents

Types of Contracts

Contracts can be classified into the following categories:

Based on creation

The types of contracts are categorised into the following three types based on their creation:

1. Express Contract: An express contract is formed by spoken words or a written document and is termed ‘express’ because the terms and conditions of these contracts are explicitly mentioned either orally or in the written form.

   For example, a signed contract of employment of A with B. This contract explicitly mentioned that A could not leave the company for two years; if A fails to comply, then legal action can be initiated against him.

2. Implied Contract: A person enters into an implied contract in any way other than a verbal agreement or a written record.

   In an implied contract, the contract is formed by the conduct of a person or from that of any given circumstance.

   For example, a person uses a metro service for travelling and pays for the same. His act of payment makes him enter into a contract of travelling, and the metro is liable to oblige such a contract and follow all associated obligations on its part such as ensuring safety while travelling and avoidance of arbitrary impedance of services.

3. Tacit Contract: A tacit contract is a contract that is implied because of an understanding between the two parties that a contradiction or objection from the circumstances does not occur.

   For example, the use of an ATM.

Based on Execution

A contract is classified into the following three categories based on its execution:

1. Executed Contract: This contract is between two parties already performing their legal obligations under the contract.

   For example, A sold his bike to B, and in return, B paid him the price of the bike demanded by A.

2. Executory Contract: Under this contract, the parties entered into the contract, but they are to perform their obligations.

   For example, A offers to sell his house to B in 20 lakhs and enters into a contract with B on B’s acceptance but, B and A both are yet to perform their part.

3. Partly Executed Contract: This contract is signed between two parties in which one party has completed his legal obligations under the contract. By contrast, the other party is yet to perform their obligations under the contract.

   For example, A sold his house to B for 20 lakhs, B paid A Rs 20 lakhs, but A is yet to deliver the possession of the house to B.

Based on Enforceability

1. Valid Contract: A contract that complies with the due procedure established by law is a valid contract. A valid contract has legal enforceability. A person can approach the court of law to enforce the terms of the agreement or seek compensation for the nonexecution of contract terms.

   For example, two people enter into a contract to trade steel against a valid consideration amount.

2. Void Contract: A void contract is not enforceable by law. A contract can be void ab initio (i.e., from the beginning) or void in the future.

   A void-ab-initio contract is void from the beginning and is not valid due to its terms and conditions. Such a condition is set when the contract terms are for some illegal act or omission.

   A void contract is defined under Section 2(j) of the Indian Contract Act 1872.

   For example: A contract between two people for murder a third person is void ab initio.

   A void contract is not valid and cannot be enforced in a court of law due to nonexecution of its terms. The contract can be void even after entering into a contract due to execution against the terms and conditions of the agreement, omission to perform an act prescribed in the contract, subsequent amendment, unforeseeable circumstances, contract with a minor or with a person of unsound mind, and other such circumstances.

   For example: A person Z agrees to handle the management of the store of C. However, an earthquake destroys the store, and the contract they entered, which was initially valid, becomes void.

   A contract with a drunk person is void as he would not be sound when drunk.

3. Voidable Contract: A voidable contract is defined as an agreement enforceable at the option of one of the parties. This contract is valid only for one of the parties but not at the discretion of the other party.

   The voidable contract is defined under Section 2(i) of the Indian Contract Act 1872.

   This contract is a type of contract that can be void if the party whose option the contract is enforceable refuses to execute the terms of the contract.

   For example, A threatens to Kill B if B does not sell his house to C. This contract is a voidable contract, and B can refuse to execute the terms of this contract, and the contract is declared void.

Based on Duration

1. Full-time and Part-time Contracts: This contract is a type of contract that is primarily used for entering into employment.

   A full-time contract typically includes total working hours scheduled of a particular company or assigned by the employer, a part-time contract generally covers a part-time work schedule of the total work time in a contract. A person entering into such a contract work only part time of the full work schedule.

   For example, a college graduate can be a full-time working employee, whereas a student currently pursuing his studies can be a part-time employee.

2. Fixed-term Contracts: A fixed-term contract is a type of contract for a certain period in which the work assigned to another party should be completed.

   The time fixed for accomplishing the task should be reasonable.

   For example, a person enters into a contract with a builder to finish constructing a house on his land within 6 months.

3. Agency Staff Contracts: This contract is a contract by agencies that hire staff or employees temporarily.

   Such a contract is used for a service that can be provided to staff that provides services on the company’s instruction to larger or smaller corporations.

   In return for the services of the staff, the agency is paid remuneration against their services paying staff their salary.

   For example, security agencies, household care agencies, or babysitting agencies.

4. Zero-hour Contracts: Contracts that deal with workers for professional services. These workers are free to work for various types of workers.

   Such contracts are under the control of some corporation or company or independent of their work.

   Workers entering these contracts work specifically on cases assigned to them, unlike full-time or part-time employees.
   Workers are paid based on their work and effort and do not have a fixed salary.

   Such employees are also called freelancers and are typically associated with some companies that act as agents to provide them with work.

   For example, companies like Urban company enter into contracts with workers to assign them to work at zero hours.

Conclusion

The contract type depends on the use and terms of the contract and the purpose for which it is formed. Any form of the contract should be in accordance with the Indian Contract Act.

People should be aware that they should not enter into a contract with an illegal objective. Such a contract is void-ab-initio because one cannot claim or enforce such a contract in case of a loss suffered.