A business contract is a legally binding agreement between parties defining the conditions under which a business arrangement is involved so as to provide clarity and accountability in transactions. Partnerships, services, and sales are just a few aspects that can be addressed in contracts. A well-drafted contract serves to protect the interests of all parties. Knowing about its key elements ensures legal and financial safety.  

In this blog, different types of contracts in Business law are covered. It explains their classification based on formation, performance, and enforceability.

What are Contracts in Business Law?

Contracts are enforceable agreements between two or more parties that define their duties, terms, and expectations-statements which clearly represent a legal commitment that each party agrees to fulfill the particular obligations. Contracts play a prominent role in business transactions such as sale contracts, service contracts, and employment contracts.

Different Types Of Contracts in Business Law

Contracts in business law are commonly divided into 7 types based on factors like formation, validity, and performance. Knowing these categories helps in choosing the right contract for any business requirement. The 7 types include:

• Based on Validity
• Based on Formation
• Based on Execution
• Based on Performance
• Based on Nature of Consideration
• Based on Legal Enforceability
• Based on Parties Involved

Classification of Contracts Based on Formation

Types of Contracts in Business law can be classified according to how they exist: express, implied, bilateral, unilateral, or electronic contracts.

• Express Contracts: The terms are explicitly stated, either in spoken or in written form, leaving no room for ambiguity. (Example: A written lease agreement.)
• Implied Contracts: The terms are understood through the actions or circumstances and not by way of explicit statements. (Example: When you pay for your haircut in a salon.)
• Unilateral Contracts: One of the parties becomes bound only on completion of a specified act by the other party. For example, a reward for finding a lost pet would be payable only when the pet is returned.
• Bilateral Contracts: Both parties agree to certain obligations at the time of the agreement. For example, in a sales contract, the seller delivers goods while the buyer pays.

Classification of Contracts Based on Performance Status

Contract law is the sub-branch of business law that deals with the classification of contracts based on their performance stage: whether executed when all obligations are performed, or executory when some are pending. The executory contracts can further be divided into bilateral contracts which both parties agree upon or unilateral contracts which are offered by one party to promise contingent on the performance of the other party.

• Executed Contracts: Contract signifying the termination where all parties are said to have performed or are performing at the time of its finalization. Example: A goods sale where the seller has delivered the product, and the buyer has made the payment.
• Executory Contracts: A contract involving one partner or at least one between two partners that has yet to fulfill something to make it perfect. Example: A construction agreement where work is still in progress or a contract for goods set for future delivery.

Classification Based on Enforceability

In classification and enforcement under business law, contracts are said to be valid (legally binding and enforceable), void (invalid from the beginning), voidable (legally valid until canceled by one party), illegal (wrongful acts rendering it unenforceable), or unenforceable (contract is legal and yet not viable in a court of law for some procedural exigencies).

1. Valid Contracts: A proper contract disqualifies its generality and satisfies all the elements necessary for legal enforceability.

Elements:

• Offer and Acceptance: A proposal so definite in its terms that it is acceptable by the other side.
• Consideration: Consideration is something in exchange for which the promise is made, e.g. money, goods, or services.
• Capacity: Parties must have legal standing for the writing of a contract (e.g. they are not minors and not legally incompetent people).
• Legality: The aim of the contract must be lawful.

Example:

An employment contract where an employer and employee agree on salary, job responsibilities, and other terms.

2. Void Contracts: A void contract is legally unenforceable from the beginning due to missing essential elements or an unlawful purpose.

Characteristics:

• Not enforceable: There is, therefore, no one who can demand that the contract be performed. 
• Invalid: It creates no rights or obligations in law. 

Examples:

• Contracts concerning illegal acts, for example, selling outlawed substances. 
• Agreements that cannot be performed: for instance, a contract for the sale of a non-existent property.

3. Voidable Contracts: A voidable contract conveys the idea of a contract being one that is valid and enforceable unless one party has the right to set it aside according to certain legal conditions.

Characteristics:

• Initially enforceable: First of all, it is a valid contract; just that one party can revoke it.
• Subject to cancellation: Under some circumstances such as coercion, fraud, or lack of capacity, an agreement can be canceled. 

Examples:

• A minor who buys a car may in the future cancel the contract.
• The contract is forged by virtue of the undue influence or misrepresentation

Classification Based on Number of Parties Involved

The types of contracts in business law are categorized into two main subdivisions based on the people involved-unilateral contracts (where only one party makes a promise) and bilateral contracts (where more than two parties exchange promises).

1. Bilateral Contracts

• Bilateral obligations are where both parties are bound.
• Each is obliged to do something to the other.
• For example, a sales contract where one party must deliver goods, then the other must pay for them.

2. Unilateral Contracts

• A promise made by one party such that the only means by which the other can accept it is through performance.
• Illustration: A reward contract where the person gets a reward upon finding a lost item.

3. Multilateral Contracts

• Involves three or more parties with obligations and rights among them.
• Example: A joint venture agreement among multiple businesses.

Classification Based on Legal Effect

Contracts can also be classified according to legal effect, as for example, executed contracts (whose all the obligations have been fulfilled) and executory contracts (pending obligations exist with respect to one or both parties).

1. Executed Contracts: These are agreements where all parties have fulfilled their obligations, making the contract complete and legally settled.

Example: A sale of a house with full payment done and transfer of title.

2. Executory Contracts: An executory contract is a contract whereby the parties have one or more pending obligations-in other words, the agreement has been partially or completely unperformed. 

Example: A service agreement where work is ongoing, and payment has not been made.

Standard Form Contracts

A standard form contract in business law (sometimes referred to as a “boilerplate” or “adhesion” contract) is understood to be an agreement pre-drafted so that only one side can fix the terms. The other party is left with little or no bargaining ability and has to either accept or reject the contract as placed before it.

• These contracts are pre-drawn with settled terms instead of being case specific for each transaction. 
• The party who proposes the contract, usually a business, sets the terms, and the other party is often left with few or no room for negotiation.
• They promote efficiency by rendering the standardisation of agreements, making transactions faster, and more uniform.
• Some examples are rental agreement, service contract, insurance contracts, and online terms and conditions.

Legal Framework Governing Business Contracts in India

The Indian Contract Act, 1872 has laid the legal foundations for business contracts in India, defining a contract as an agreement which creates law and functionally covers elements like offer, acceptance, consideration as well as contractual capability of the parties.

• Indian Contract Act, 1872 – The broad principles of contract law in India are thus framed detailing the conditions in which a contract is fulfilled and enforced.
• According to Section 2(h) of the Indian Contract Act, ‘an agreement enforceable by law is a contract.’
• Specific Relief Act, 1963 – This Act gives legal remedies in cases of violation of contracts, including specific performance and injunctions.
• Sale of Goods Act, 1930 – Governs contracts related to the sale and purchase of goods.
• Consumer Protection Act, 2019 – To protect consumers in matters involving contract dealings.
• Companies Act, 2013 – Governs contracts of corporate entities.
• Partnerships Act,1932 – Regulates contracts amongst partners.
• Commercial Courts Act, 2015 – Aims at the speedy resolution of disputes arising from commercial contracts.

Role of Legal Professionals in Business Contracts

Legal professionals role in business contracts by ensuring their legality, protecting client interests, and supporting transactions. Their functions range from drafting to negotiating and reviewing contracts to handling disputes.

Contract Drafting and Review

• Ensure that contracts are lawful and observe relevant industry regulations.
• Protect the interests of the client with clear clauses regarding confidentiality, dispute resolution, and liabilities.
• Stay simple and clear so that there is no chance of misunderstanding and ambiguity.
• Identify risks and advise ways to curb potential liability.

Negotiation and Compliance

• Negotiate on behalf of clients to obtain the best possible outcome.
• Ensure contracts comply with legal and regulatory standards.
• Promote and maintain healthy business relationships through fair and transparent contracts.

Dispute Resolution

• When disputes arise, they are resolved through mediation, arbitration, or litigation.
• Counseling the client on procedures for contract termination in case of breach or other legal grounds.

Common Issues and Disputes in Business Contracts

Despite careful drafting, business contracts often give rise to disputes due to misinterpretation, non-compliance, or breach of terms. Knowing these usual problems can help businesses avert potential problems and make their contractual relationship 

• Breach of Contract – It refers to a failure by one or more parties to perform any contractual obligation, thereby creating financial and legal liabilities.
• Ambiguity in Terms – Include vague or poorly defined clauses that give way to different types of understandings and interpretations.
• Non-Compliant with Regulations – Contracts that do not comply with legal or industry standards and are thus rendered unenforceable.
• Payment-and-Delivery Disputes – Disputes arising out of late payments, non-payment, or non-delivery of goods or services as per agreement.
• Dispute Resolution Challenges – Problems regarding the enforcement of arbitration clauses, conflicts of jurisdiction, or protracted legal processes.

Conclusion

Understanding the different types of contracts in business law is for ensuring legally sound agreements and business operations. A well-structured contract not only protects parties from potential disputes but also ensures compliance with relevant laws. Whether it’s drafting, reviewing, or negotiating contracts, having the right legal support can prevent costly legal complications. With Zolvit, businesses get expert assistance in creating and managing contracts to their needs. From drafting precise agreements to ensuring legal enforceability, it simplifies business compliance so that it can focus on growth.