Understanding the Different Types of Contracts | UpCounsel (2024)

Key Takeaways

• A contract is an agreement between two or more parties in which each party’s rights and obligations are defined to provide legal certainty and protection.
• Valid contracts are those that fulfill all the legal formalities (offer, acceptance, consideration, consent, lawful object) and can be enforced by courts.
• Void contracts are unenforceable because they lack essential elements or involve illegal activity, making them unlawful.
• A voidable contract is one that is valid until one party decides to void it because of fraud, misrepresentation, or coercion.
• Working with a contract lawyer is important to ensure your contract is enforceable and valid.
• Post a job on UpCounsel to find a contract lawyer in your state.

A contract is an agreement between two entities or individuals that creates a legal obligation and protects both parties.

Due to the many different circ*mstances surrounding contract formation, there are also many different types of contracts to suit each situation.

Here, we will explore some of the different types of contracts, including when they are used and other fundamental details.

What is a Contract?

A contract is a written or oral agreement between two or more parties that outlines each party's rights and obligations. It is meant to protect the parties by making an arrangement's terms, conditions, and expectations legally clear and binding.

Contracts are the legal foundation of any business deal, partnership, employment relationship, and many other situations where a clear and enforceable agreement is necessary.

Types of Contracts

Different types of contracts determine the rights and duties of both sides. Various contracts exist to meet the specific needs of parties in different circ*mstances.

For example, a non-disclosure agreement (NDA) and a lease agreement. These situations have unique needs, and distinct contracts are tailored to meet them.

In any situation, a contract should provide a framework that outlines the terms and conditions to ensure clarity and legal protection.

Next, we will discuss several different types of contracts.

Based on Validity

Classifying the different types of contracts based on validity will help you understand their enforceability, which in turn will help you determine the legal status of each contract type.

Here are five contracts based on validity:

Valid Contract

A valid contract is legally enforceable because it meets the necessary requirements. These requirements usually include an offer, acceptance, consideration, mutual consent, and legal purpose.

Both parties must perform their terms, and the contract can be enforced in court. For instance, a signed contract to buy a car, with all terms agreed to between a valid contract.

Void Contract

A void contract is one that is not enforceable from the outset and, therefore, never takes effect. It is either illegal or lacking one or more essential elements of a contract.

Because the law treats a void contract as if it had never been made, neither party can enforce it or create any obligations under it.

An example of a void contract could include a contract or agreement to commit a crime.

Voidable Contract

A voidable contract is a valid contract that one party can choose to void or affirm. These contracts are legal and valid until one party (usually the aggrieved or unbound party) elects to rescind them for any reason.

The party unbound by the contract can void the contract for fraud, misrepresentation, coercion, undue influence, or lack of capacity to contract.

If the unbound party elects to void the contract, it is treated as though it never existed. A contract signed under duress is an example of a voidable contract.

Illegal Contract

An illegal contract is one that is prohibited by law or at least violates public policy, so it is unenforceable as invalid from the start. None of the parties in an illegal contract can ever enforce a contract founded on or promoting an illegal objective.

As a result, neither party can seek legal remedies for breach of an illegal contract.

Examples include agreements to engage in criminal activities or contracts that violate regulatory statutes.

Unenforceable Contract

An unenforceable contract is valid but cannot be enforced due to certain legal defenses.

While the contract may fulfill all the essential requirements, external factors—such as the statute of limitations, lack of written form (in cases where writing is required), or ambiguity—can render it unenforceable.

If challenged in court, an unenforceable contract will not result in legal action to enforce its terms.

An example of an unenforceable contract is an oral agreement for selling real estate, which typically requires a written contract under the Statute of Frauds.

Based on Formation

Contracts based on formation are categorized by how they were created. They include express contracts, implied contracts, and quasi contracts.

Express Contract

During the formation of the express contract, parties form conditions either orally or in writing. This offer is wholly accepted with the terms of an offeree.

Implied Contract

Implied contracts can either be implied-in-fact or implied-in-law.

• For a contract implied-in-fact, the joint agreement creates obligations and promised intentions among the parties, where both are not expressed in words.

This type of contract is not articulated directly but through facts and circ*mstances, demonstrating the shared intention to achieve an agreement.

• Implied-in-law contracts do not depend on the parties agreeing to an intention to enter that agreement. Implied-in-law exists to prevent any party from being unjustly enriched by another.

Implied-in-law is not dependent on the normal contract rules of offer, acceptance, and mutual agreement.

Quasi Contracts

A quasi contract, or a contract implied in law, resolves a dispute over damages between parties without a formal contract.

A quasi contract differs from an ordinary one because it is an obligation a judge imposes on one party to compensate the other.

The judgment is made retroactively and is designed to compensate for one party's gain of an advantage at the expense of the other.

Based on Execution

Other contracts are based on execution, meaning they refer to how the contract’s obligations are fulfilled.

Executed Contract

All involved parties have already fully performed obligations in an executed contract. It is executed once the contract’s terms are met and no obligations or actions remain.

Executory Contract

In this case, some or all of the contract’s obligations have not been met yet. These executory contracts are, therefore, still in effect until they are met.

Based on Nature of Consideration

Contracts based on nature of consideration refer to what each party offers to the other as part of the agreement.

Consideration is one of a contract's fundamental elements. It represents the exchange of value that makes a contract binding and enforceable.

These contracts may be bilateral or unilateral.

Bilateral Contract

In a bilateral contract, both parties promise to perform an act in exchange for something else. This promise is given in consideration for the other’s promise.

Again, consideration is one of the fundamental elements of these contracts. Each involved party is under an obligation to perform their promise.

Unilateral Contract

A unilateral contract involves an interested, service-requesting party (the offeror) and a potential service-rendering party (the offeree). They are agreeing the offeree will render a specified service for a fee.

In a unilateral contract, the offeror requires performance from the other party rather than a promise.

An offeree cannot be sued for:

• Abandoning the project
• Not being able to finish their work

This is because they did not make a promise. Therefore, only the offeror is required by law to comply.

Specific Contract Types

Next, let’s consider some of the most common contract types.

Employment Contracts

Employment contracts outline the terms and conditions of the employment relationship between an employer and an employee.

They detail the employee's role, responsibilities, compensation, work hours, and other essential terms, including benefits and grounds for termination.

Employment contracts may include confidentiality agreements, non-compete clauses, and dispute resolution procedures.

These contracts are typically used at the beginning of the employment relationship to set clear expectations and protect the interests of both the employer and the employee.

Non-Disclosure Agreements (NDAs)

Non-disclosure agreements (NDAs) are contracts designed to protect sensitive information from being disclosed to unauthorized parties.

NDAs safeguard proprietary or confidential business information and ensure parties involved do not share this information without permission.

They define what information is confidential, outline the receiving party's obligations, specify the duration of confidentiality, and state the penalties for breaches.

Non-disclosure agreements are commonly used during:

• Business negotiations
• Partnerships
• Employment
• Product development
• Mergers where sensitive information is exchanged

Sales Contracts

Sales contracts are agreements that legally bind a buyer and a seller when exchanging goods or services. They ensure the terms of sale are clear, detailed, and enforceable.

Core elements of sales contracts include:

• Description of the goods or services being sold
• Agreed price
• Payment terms
• Delivery conditions
• Warranties
• Remedies available in case of a breach

Sales contracts are commonly used in various transactions, including retail, wholesale, and online sales, to provide clarity and security to both buyers and sellers.

Lease Agreements

Lease agreements define the terms under which a tenant rents a property from a landlord. These contracts outline the rights and responsibilities of both parties and provide legal protection in the rental arrangement.

They are also used for leasing other property, including vehicles.

Partnership Agreements

A partnership agreement governs the terms of a business partnership and sets out the relationship between the partners. It outlines each party's roles and contributions.

These agreements cover key areas, such as:

• Ownership interests
• Capital contributions
• Management responsibilities
• Profit and loss distribution
• Decision-making processes
• Exit strategies

Partnership agreements are used when forming a partnership or joint venture. They help define each partner's rights and responsibilities, prevent future disputes, and streamline business operations.

Service Agreements

Service agreements detail the terms under which services are provided by one party to another, ensuring both parties understand their obligations and expectations.

These agreements include:

• Scope of work
• Service fees
• Timelines
• Payment terms
• Confidentiality requirements
• Conditions for terminating or renewing the contract

Service agreements are common in consulting, maintenance, IT services, and freelance work. They provide a clear framework that outlines how services will be delivered and paid for.

Contractor Agreements

Contractor agreements are used when hiring independent contractors. They distinguish their relationship from that of employees and specify the terms of their engagement.

These agreements typically cover the project description, compensation, contract duration, and confirmation of the contractor's independent status. They may also address intellectual property rights, liability insurance, and confidentiality issues.

Contractor agreements are necessary for businesses that engage freelance professionals, consultants, or contractors for specific projects. They ensure clarity and compliance with labor laws.

Simple Contract

A simple contract is any kind of written or oral agreement.

The following are not required for a simple contract to be legally binding:

• Witnesses
• Signatures
• Seals

Contract Under Seal

According to traditional principles, a contract represents a legal act only if stamped. A contract under seal guarantees that legal consequences are conceivable. These formal contracts do not require consideration.

Unconscionable Contracts

An unconscionable contract is an unfair contract made only in favor of the superior party in the negotiations.

Adhesion Contracts

An advantageous bargaining party creates adhesion contracts or “contracts of adhesion.” These contracts allow the weaker side to accept or reject them.

Aleatory Contracts

Aleatory contracts are based on a mutual agreement of the parties involved. Their effects are activated under uncertain events, while one or both parties accept the risk.

Project Management Contracts

Several different contract types are used in project management.

Among the most common project management contracts are:

Lump Sum or Fixed Price Contract Type

A lump sum or fixed price contract regulates all construction-related activities with a total fixed price agreement.

Lump sum contracts are favored when a clear scope and a defined schedule are negotiated and accepted.

For example, suppose it is necessary to shift the liability to the builder and prevent changes in orders for undetermined work. In that case, this type of contract is best suited. Due to the present risk, a contractor holds some of the cost.

If the lump sum contract were signed, obtaining credit for an uncompleted job would be challenging.

Cost Plus Contracts

Cost plus contracts cover:

• Actual cost
• Purchase
• Other expenses incurred from the construction work

Before the negotiations begin, cost-plus contracts mustinclude a specific expense amount. These amounts represent a percentage of the material and labor costs, covering the continuing operation costs and the contractor's profit.

Cost can be direct or indirect, and it must include all critical cost aspects of a contract.

Time and Material Contracts When Scope is Not Clear

Time and materials contracts are types of contracts used in a case where:

• The capacity and quantity of time and materials are undetermined, which makes the project risky.
• The tariff per hour or day is compatible with the owner and the contractor, including possible additional costs during construction.

The owner can periodically determine the project's duration with a contractor, which must be performed to reduce the risk to a minimum.

The downfall of this type of contract is that the seller can increase an indefinite or unknown expense amount, which is the cost the buyer has to pay.

Unit Pricing Contracts

Unit price contracts are commonly called hourly rate contracts. This type of contract combines:

• Reimbursable expenses
• Fixed price type of contracts

Unit pricing contracts can be adjusted when the owner offers certain quantities and prices for a predetermined number of items.

Importance of Choosing the Right Contract Type

Choosing the right contract type and effectively drafting it can make the difference between a contract being enforceable and valid. You risk serious legal and financial repercussions if you enter into an agreement without a valid contract.

Fortunately, contract lawyers are extremely well-versed in all things contract related. Enlist their help to ensure your contract is legally sound.

Post your legal needs on UpCounsel's marketplace to find a contract lawyer in your state. UpCounsel accepts only the top 5% of lawyers on its site.

Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience. This includes work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.