This article has been written by Nikunj Arora of Amity Law School, Noida. This article provides a detailed overview of the types of contracts in business law, along with a brief discussion of business law and the importance of contracts in business law.
This article has been published by Sneha Mahawar.
Table of Contents
Business law encompasses a wide range of responsibilities associated with an organization’s operations. The knowledge of some basic business law can be helpful to business owners when starting a business, hiring employees, expanding a business, or closing its doors.It refers to the set of statutes, regulations, and case laws governing all transactions among individuals, organizations, partnerships, and other forms of businesses to gain economic advantage. The role of business law in safeguarding a shareholder’s rights is instrumental in ensuring that those rights are protected. Business law forms the basis of all business decisions and activities. Furthermore, there are several kinds of legal processes involved in building a business, including but not limited to, leasing the property, getting permits, etc., and for this purpose, the business law attorneys are well versed in all the relevant regulations, and thus can be of great assistance to the company in establishing its operations promptly.
Contracts play a vital role in business law. Regardless of the size of the company, contracts and agreements are essential to the running of a business. In the early decades, few business agreements were written down, and most contracts of all sorts were negotiated with a handshake, the parties to this contract may then decide to go to court if there were problems and the problem would then be decided by a judge regardless of whether the contract was in writing or not. Contracts have become increasingly detailed these days and every effort is made to make all possibilities and eventualities clear. The article provides a detailed analysis on types of contracts under business law.
Overview of business contracts
What is a contract
A contract is a written agreement between two parties stating that both parties shall be legally bound to perform certain tasks, or refrain from doing certain tasks, as agreed upon between them. This term is often used to describe transactions of any kind, including sales, services, the transfer of ownership of property, or a combination of different types of transactions. An individual, business organization, or government agency can enter into a contract with another person. Throughout a contract, more than two individuals may be involved. In most cases, the parties to a contract only have duties and rights arising out of that contract if they participate in that contract.
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. Unless the contract is fraudulent or results from undue influence or duress, parties to a contract are required to fulfil the terms stated therein, even if they appear to be a bad bargain or improvident.
Most people are familiar with the concept of agreements and contracts as part of their everyday lives. The most important part of any contract is the outline of the terms of the agreement. By comparison, contracts are more common than agreements.
There are two primary responsibilities of contract attorneys, i.e., the creation of contracts and the enforcement of those contracts. A high-value or complex transaction requires the help of these legal advisors to ensure that parties have a legally binding contract that is fair, straightforward and easily understood. An experienced contract attorney can mediate a solution if one of the parties breaches the contract, or litigates the matter in court if the other party fails to uphold their end of the agreement.
A contract lawyer can work in many different professional settings. Some of them open their practices in which they provide contract legal services independently or in collaboration with other attorneys. Some lawyers work as in-house counsel for large corporations or companies that enter into contracts on a regular basis and require regular legal oversight. Others work in large law firms that specialize in different areas of law and assist their clients with creating and enforcing contracts.
Importance of contracts in Business Law
In businesses, irrespective of their size and market share, contracts are necessary to protect their information and keep out unscrupulous investors. Furthermore, it can protect employees when employers fail to honour their contractual obligations by making false promises and misleading them. We must understand, in this day and age, the importance of contracts in the world of business. Because of the following reasons mentioned below, contracts are important and become inevitable:
- Acts as evidence of details: Contracts are created primarily to record details that both parties have agreed upon. This specific information provides the individual with a clear picture of what they are to expect from the third party or monetary expectations. The details you provide in a contract will serve as evidence that your claim is legitimate.
- Prevents misunderstandings: Misunderstandings occur in any kind of business for a variety of reasons. It is imperative that both parties read and abide by the rules outlined in the contract to avoid these situations. The business is affected by it heavily since breaching the contract rules can cause conflict between the parties and thus have a negative impact on the business. This is why contracts are crucial for businesses.
- Ensures safety: As it specifies the tenure of the contract and the roles of the parties, the contract is paramount to ensuring the parties’ security. Employees are legally responsible for performing their duties and employers are legally responsible to pay them on time. Differing from the contract constitutes a breach of contract, and either party can take appropriate action in response to such a breach. Contracts are thereby extremely important. During times of a breach of contract, if any of the parties file a complaint against the other, they can use the contract as proof.
- Assures confidentiality: A contract can contain a confidentiality clause or a separate non-disclosure agreement (NDA) which acts as protection of confidential information of the respective parties. The involved parties are not permitted to reveal the details of their business transactions or monetary transactions to anyone else. The law imposes legal suffering on either party in case of disclosure as per the terms of the contract.
- A document that records business relations: The written contract is a statutory document stating the mutual consent of the actions contained within. The contract can be used for future reference and, in addition, includes information regarding the agreed-upon deadlines for the delivery of any work that has been assigned as per the contract. There is also a clear indication of the duration of the contract in the agreement, which helps to have a better understanding of the termination. If the other party does not comply with the rules mentioned in the contract or is bypassing the terms, then, in the worst-case scenario, the contract may be terminated.
Types of contracts under Business Law
A contract can be as simple as a handshake agreement for the performance of an assignment or as formal as a written document. Written or oral agreements may be witnessed, sealed, or signed. It was once thought that sealed contracts were legally enforceable. Business law today recognizes several types of contracts, including implied contracts; sealed contracts are less common in business transactions.
The following are the types of contracts under business law:
Based on performance
Executed contracts are signed contracts that establish contractual relationships between the parties. After the agreement has been fully signed, both parties commit to upholding the legal obligations outlined in the contract. A contract that has been executed can refer to an agreement reached between two or more parties with signatures, as well as a contract that has not only been agreed to but also has been executed. In both cases, the definition that has been used is legally valid and can be applied per the context.
It is the date on which all parties have signed the hard copy of the contract that defines the execution date of a contract. It is important to distinguish between the execution date and the effective date, which denotes the time when the agreement within the contract becomes effective.
As an example, consider signing a lease agreement on a new home in your town. As soon as you sign the contract, it is considered to be executed since you intend to occupy the unit and everyone agrees to the terms of the agreement. The effective date, however, is not until the move-in date. The effective date of your agreement is the date on which all of its terms will commence taking effect. This means that the agreement will become legally binding upon this date.
In an executory contract, both parties have yet to fulfil their obligations under the agreement. A future consideration is provided for the promise made in such a contract. For example, A proposal to sell certain shares to B. The offer is accepted by B. Now under this situation, neither A has yet delivered the shares, nor B has paid the price.
The majority of executory contracts involve two parties, one a debtor and the other a borrower. The complexity of some contracts is greater than others. There are a variety of executory contracts, including the following:
- Lease of rental housing: The tenant pays the landlord for the use of the space for a set term.
- Lease of equipment: The equipment is provided by the renter, and the loaned equipment is rented by the borrower.
- Development contract: An owner pays the contractor when a certain milestone is reached on a building, or the contractor performs certain duties for the owner.
- Car lease: A consumer leases a car from a dealership and leases the vehicle in exchange for the payments.
- Licenses of intellectual property: The licensor refrains from suing as long as the licensee only makes use of the IP as described in the license.
Partly executed and partly executory contracts
Partly executed and partly executory contracts are those contracts in which one party has completed his obligations and the other party is still obligated. Take an example where A’s shares are being offered to B. The offer is accepted. B has yet to pay for the shares that A has already delivered.
A unilateral contract has only one party. The contract usually comes into existence when only one party makes a promise for himself/herself, but it is open and free to be fulfilled by anyone who wants to or can do so. In such a case, only one party is obliged to fulfil his/her promise. A contract will only be deemed valid when the promise of one party has been fulfilled. Unilateral contracts include, for example, insurance policy contracts, which are usually partially unilateral. A unilateral contract entails only one contractual obligation on the part of the offeror. The offeror has an obligation under unilateral contracts.
Unilateral contracts are those in which the offeror promises to pay for certain activities that are open to other parties and may be random or optional for them. A unilateral contract is enforceable under contract law. Yet generally, legal issues do not arise until the offeree asserts that he or she is entitled to remuneration based upon the performance of certain acts. However, legal disputes usually arise when the offerer does not pay the agreed-upon amount. In such situations, a breach of contract must be determined based on the terms of the contract and if it can be shown that the offeree is entitled to be paid for certain acts.
Bilateral contracts are agreements signed by two parties in which both parties agree to fulfil their part of the bargain. In bilateral contracts, the offeror and the offeree typically have equal obligations or consideration, though this need not always be the case. A bilateral contract is sometimes referred to as a side deal in several cases, such as in multilateral trade negotiations. Hence, both the parties are involved in the general negotiations, but may also find it necessary to negotiate a separate contract that addresses the specific interests they have in common. Examples of bilateral contracts include sales agreements, leases, and employment contracts.
Most binding agreements are bilateral. The parties are both obligors (those who are obligated to each other) by their promise, and obligees (those bound by a promise) based on the other party’s promise. Contracts are signed to ensure that they are clear and legally enforceable. As mentioned above, bilateral contracts can include a sales agreement. Under this case, in exchange for the title to a car, the buyer may agree to pay the seller a certain sum, and in exchange for the sale amount, the seller delivers the car title. A breach of contract occurs when either party fails to fulfil his/her responsibility.
Based on the mode of formation
An express contract is the result of interactions between two parties in the course of which they discuss the terms of the agreement and the commitments made. This contractual agreement shall not necessarily be formal and need not be in writing. What it requires is that the parties clearly state their intentions in the agreement. Contracts are usually formed by express agreement. In other words, the contract could be formed verbally or orally, or it may be accomplished in writing by a formal contract, click-wrap agreement, shrink-wrap agreement, exchange of emails, letters, WhatsApp, or other communication methods. An online trading platform can electronically accomplish this.
The contract is partially formed orally and partly in writing: some of it is written, and some of it is spoken. As an example, the parties might have a conversation through an email exchange, in which a contract is formed. A conversation’s words are incorporated into the contract, as are the emails’ contents. In the email exchanges, the proposal might be outlined and the price for services may be discussed.
In an implied contract, one or more parties have a legally binding obligation based on the actions, conduct, or circumstances of the other. This type of contract has the same legal force as an express contract, which is a contract entered into by two or more parties voluntarily and verbally or in writing. On the other hand, implied contracts are presumed to exist, but they need not be confirmed in writing or verbally.
Implied contracts are based on the principle that no one should receive unjust benefits at the expense of another, and a written or verbal agreement isn’t necessary to ensure fair dealing. An implied warranty, for example, is a form of implied contract. The product that is purchased must be able to fulfil its purpose. In some cases, it is difficult to enforce implied contracts since proving the validity of a claim is an issue of argument rather than a matter of producing a signed document. Furthermore, some jurisdictions limit the scope of implied contracts. According to some courts, the contract for a real estate transaction must include a written agreement.
Implied contracts can be classified as implied-in-fact contracts or implied-in-law contracts. By the actions and actions of the parties, implied-in-fact contracts are created. An implied contract is created, for example, when a customer enters a restaurant and orders food. The owner of the restaurant is committed to serving the food, and the customer is committed to paying the prices listed on the menu. Unwritten contracts, such as implied-in-law contracts, are also known as quasi-contracts. Both parties have no intention of creating a legally binding contract.
As the name suggests, a quasi-contract is a retroactive agreement between parties who had no previous obligations towards each other. It is imposed by a judge to right a situation where one party gains an advantage at the expense of another.
One of the main purposes of the contract is to prevent one party from unfairly benefiting from the situation at the expense of the other. An agreement with these terms might be imposed when a party accepts goods or services without having requested them. Payment is then expected when the goods or services are accepted. A quasi-contract is an agreement between two parties when the second party has possession of the first party’s property. There need not be a previous agreement between the parties. Due to its construction in a court of law, the agreement is legally binding, so neither party has to agree to it. In situations where one party has an advantage over another, the quasi-contract is designed to create a fair outcome.
Quasi-contracts are also called implied contracts. The case would be decided and restitution would be ordered from the defendant. In Latin, restitution is called quantum meruit or what is known as the amount earned or the amount by which the defendant was unjustly enriched.
In some cases, these are similarly referred to as constructive contracts, since the parties involved do not already have an existing contract. In most cases, however, a quasi-contract cannot be enforced if an agreement already exists.
Contracts effected through e-commerce are called electronic contracts since they are often signed without parties having to meet each other. They are typically commercial agreements conducted electronically. In addition to traditional agreements, the Indian Contract Act, 1872 recognizes oral contracts as long as they are made with the free consent of parties competent to contract, for a lawful consideration, and a lawful purpose; they must not be declared void by express provision. Consequently, nothing in the Indian Contract Act prevents electronic contracts from being enforced if they meet all the essentials of a valid contract.
An essential component of a valid contract is free consent. Typically, e-contracts do not allow for negotiation, and they are viewed as ‘take it or leave it transactions. It has been held that unfair contracts are void in India when they involve terms of a contract negotiated by two parties in which one party holds a dominant position and the terms of the contract were negotiated between those two parties.
It is not possible to regulate e-contracts in India. A few provisions of the Indian Evidence Act, 1872 and the Information Technology Act, 2000 provide recognition and regulation of e-contracts. There are detailed provisions in the I.T. Act governing attribution, acknowledgement, and dispatch of electronic documents. According to the IT Act, a proposal, an acceptance, a revocation of a proposal, and a revocation of an acceptance can be stated in electronic form, and these things shall not be deemed unenforceable solely because they were expressed via such electronic means.
Based on validity or enforceability
A written or verbal agreement between two parties is required for the creation of a valid contract. A legally binding contract consists mainly of six elements. An enforceable contract must contain an offer, acceptance, consideration, capacity of the parties in terms of age and mental ability, the intent of both parties, and the object of a contract shall be legal. To put it another way, a contract is enforceable when it is made by both parties, backed by money or something of value, both parties intend to stand by their promises, and what they offer is in compliance with the law.
Void contracts are agreements that are illegal from the moment they are created and unenforceable. As opposed to a void contract (which will never become enforceable), 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. The Indian Contract Act, 1872 defines void contracts under Section 2(g) as contracts or agreements that cannot be enforced by law. When one or both of the parties cannot enforce a contract, it is considered null and void. Contracts can be declared void for many reasons, such as the use of unlawful means, incompetency, supervening impossibility, etc.
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. A contract will remain valid and enforceable even though a party (with the power to reject it) does not reject it. As defined by Section 2(i) of the Indian Contract Act, 1872, a voidable agreement is valid as long as one of the parties or both of them have the right to terminate it. The most common reason why a contract may be voidable is when one party did not freely consent to it. The agreement between them remains valid if the parties agree to the terms, and it ceases to be valid if they do not.
It depends on factors such as coercion, misrepresentation, undue influence, etc., which determines whether or not a contract may be voidable at the option of one of the parties. As the decision rests with the aggrieved party, the contract may be declared void at the option of the aggrieved party.
The term illegal agreement refers to any agreement that violates existing laws in a particular field and is criminal. In addition to agreements that are illegal, those that are immoral and contrary to public policy also fall under this heading. Section 23 of the Indian Contract Act, 1872 primarily relates to the object or purpose of the contract. Hence, in the case of illegal objects that are contrary to public policy, the contract will be void and unenforceable. In such cases, the parties have no valid obligations regarding the performance of the contract, and they are subject to criminal liability in the event they perform an illegal act in place of consideration.
The legal definition of an unenforceable contract shall be ‘a contract which is not to be enforced by a court, whether it is written or orally’. The court may refuse to enforce a contract for several different reasons. A contract may be unenforceable due to the subject matter of the agreement, because the other party to the agreement unfairly benefited from the agreement, or even if there is insufficient evidence to support the agreement.
An option contract permits the contracting party to enter into a different agreement at a later date with a different party. As an example of an option contract, say a seller is paid by a buyer to remove their property from the market, then a new contract is made to purchase the property once the buyer decides to do so.
As an adhesion contract is typically drafted by parties with greater bargaining power, it is often called a ‘take it or leave it’ contract. The weaker parties cannot influence the outcome. Instead, they will be able to choose whether to accept or reject the contract. There is little or no negotiating power for one of the parties under these contracts.
It is important to note that there are contractual agreements that do not become effective until a particular event occurs. Insurance policies are an example of this. Insurers require customers to pay premiums and to guarantee payment of the insured goods in the event of an accident. Here we see that the insured or purchaser pays a premium for a service that they will never receive and that the insurers or sellers may have to pay more than the premiums received from the purchaser.
Lump-sum or fixed price contracts
A fixed price for a project is established between the seller and the buyer in these types of contracts. These types of contracts come with certain risks. If the projects were to end up being more costly than originally projected or take longer to complete, the sellers would still get paid the amount originally agreed upon.
It is not enough for a contract to be clear and specific, it shall also meet certain requirements to be legally enforceable. Valid contracts are legally enforceable. A legally enforceable contract can be invoked in court as support for a decision made regarding a disputed matter. In the absence of certain essential components, a contract cannot be legally enforced. There is no requirement for a contract to be in writing unless there is a special purpose for this. Most contracts are not filed in court, and they may easily be verbal. The parties are protected if something goes wrong when they have a written agreement. The laws governing contracts and the underlying legal doctrines are powerful and can have profound legal consequences that could make or break your business. An expertly drafted contract will protect your business’s interests and provide you with the full protection of all your rights in any given transaction. A well-written, enforceable contract can ensure your business’ interests are protected and its rights can be enforced in several situations.
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