Contract: What is a Contract? Contract V/S Agreement – Types of Contracts

Contract: A voluntary, deliberate, and legally binding agreement between two or more parties is known as a contract.

A verbal or spoken agreement between two parties that is intended to be enforceable by law is called a Contract

Most of the contracts exist in written form, however, there may also be spoken or implied or verbal contracts. The parties entering a contract owe rights and responsibilities to each other. There is always an element of mutual benefit in all the contracts.

Difference between Contract and Agreement:

Earlier, there was a misconception that contract and agreement are same things. But nowadays, both the terms are wide apart and stand for quite different meanings.

The statement that all contracts are agreements but all agreements are not contracts is enough to highlight the true differences between an agreement and contract.

Agreement: An Agreement is a wider concept which means an arrangement and understanding between two or more parties about their rights and responsibilities.

An agreement is an informal document that has no legal value and also lacks an element of consideration. On the other hand, a contract is a legally binding agreement between two or more parties for doing or not doing something specific. The contract is a formal document with an element of consideration always.

What are different types of Contracts?

Depending on the kind of agreement, there are different types of contracts. Some of the main types of contracts are:

1. Written Contracts
2. Verbal Contracts
3. Standard form Contracts
4. Periodic Contracts

1-Written Contracts: Written Contracts are in the form of written documents that outline all the agreed details and rights between two parties. Written contracts include details on materials, timeframe, payments, laws, rights and agreed procedures. These are the most preferred contracts because these minimize the risks involved and all the terms and conditions are clearly written and are widely accepted by courts all over the world. Written contracts are essential when a large sum of money is involved and one of the parties wants to keep certain information confidential.

2-Verbal Contracts: Verbal contracts are the contracts without any written document and exist only as a verbal agreement between the two parties on agreed terms. Verbal contract works well as long as there is no dispute because there is uncertainty over the rights and obligations of both the parties in it. There are more chances of dispute because you have nothing like a written proof.

Nowadays, part verbal and part written contracts are also common. These are the contracts in which some of the terms and conditions are outlined in written form and rest remain verbal. There are also some verbal agreements that are supported with some partial paperwork. For example, quotes and some specifications related to a particular verbal contract are usually in written form.

3-Standard form Contracts: Standard form contracts are pre-prepared by contracting parties that allow their customers or consumers or contractors to fill in some blank spaces and sign their contract form.

A pre-defined set of terms and conditions of a company or a party which is provided to the consumer, customer or other party to sign, is known as standard form contract.

The names, dates, and signatures are among the columns that need to be filled. These types of contracts prove beneficial for one party, especially for the party which prepares this form. All the legal points are in the form of fine print in these contracts. It is advisory to consult with a lawyer before signing such contracts because the printed terms and conditions are not at all easy to understand for a common man. Remember to cross out all the irrelevant blank spaces in the form to avoid any conflict.

4-Periodic Contracts: Period Contracts are the contracts in which the contractor is bound to work from time to time on the same conditions outlined in the periodic contract. These types of contracts are common in building and construction industries where a contractor works with a hirer for long time on the agreed terms and conditions. Period contracts are in the form of a template and are equally beneficial to both for the hirer as well as the contractor.

Business Contract Types:

Nowadays, increasing interests of people in businesses have given rise to business contracts. Business contracts are also of three different kinds.

1. General Business Contracts
2. Sales-related Contracts
3. Employment contracts

A-General Business Contracts: General Business Contracts are the contracts that cover the entire structure of a business along with protecting the rights and responsibilities of stakeholders.

There are four types of Business contracts are:

I-Partnership Agreement contract: Partnership agreement contract is all about the partnership, the relationship between the partners, and their individual obligations and duties towards business.

II-Indemnity Agreement: Indemnity agreement is a special kind of agreement in which one person indemnifies the other in case of any damage or loss.

III-Nondisclosure Agreement (NDA): Nondisclosure agreement (NDA) is a type of contract in which one party binds the other to never share the confidential and proprietary information.  NDA  Nondisclosure contract exists between a business and its vendors, suppliers, independent contractors, employees, and all other service providers.

IV-Property and Equipment Lease: Property and Equipment Lease contracts contain all the lease and equipment information of any building. This information may include deposits, terms, monthly payments, maintenance agreement, and others.

Sales Contract Types:

B-Sales-related Contracts: Sales-related contracts are very common in everyday life because of the deal purchase and sale of property, land, goods, and services. The Sales contract also provides the ways of transferring the ownership of titles to the parties and heirs.

There are three kinds of  sales related contracts:

I-Bill of Sale: A bill of sale is a legal document that allows the transfer of title from one person to the other. Bill of sale contract is often used for sale and purchase of vehicles.

II-Purchase Order: It is also a legal agreement that binds a business or an individual to buy certain things at some specified rates. The quantity to be purchased, the delivery date, and the terms of payment are also written in Purchase Order agreement.

III-Security Agreement: The Security agreement is used in banks and other financial industries. The security agreement pledges an asset or some property for providing loans to the businesses or individuals. The pledged property is forfeited in case the borrower defaults the loan.

Employment Contract Types:

Employment contracts are the most common types of contracts that we see often all around us. These are the contracts that outline the terms and conditions of employment. Employment contracts include all the information regarding work timings, salary, working environment, and the working place.

Three different types of employment contracts are:

I-General Employment Contract: General Employment Contract is the most common type of employment contract which outlines all the details of the relationship between an employer and an employee. The details written in this contract include job duration, salary, benefits, and grounds of termination.

II-Noncompete Agreement: Noncompete Agreement is an agreement that prohibits an employee that has left a business or company to compete with that business or company for a specific period of time.

III-Independent Contractor Agreement: Independent Contractor Agreement is a contract that details out the relationship between an employee and employer for the completion of a particular project. The terms and conditions and working relationship between the employer and the employee are renewed with the signing of every new project with the Independent Contractor Agreement.

Government Contract Types:

In many countries, especially in America, the federal government also enters into contracts with individuals, agencies, and various service providers.

Following are the 9 types of Government Contracts:

1. Fixed Price Contracts
2. Cost-Reimbursement contracts
3. Incentive Contracts
4. Indefinite-Delivery Contracts
5. Time-and-Material Contracts
6. Labor Hour Contracts
7. Sealed Bidding
8. Negotiation, and
9. Defense Logistics Agency Reverse Auctions

There are also many other types of government contracts on the basis of the nature of the project, validity, formation, and execution.

Types of Contracts on the basis of the Validity:

On validity basis, the contracts can be divided into three types. These are:

• Valid Contracts (Containing all essential elements of a contract)
• Voidable Contracts (Missing free consent), and
• Void Contracts (Without any Legal effect)

Types of Contracts on the basis of Formation:

There are also three types of contracts on the basis of the formation. These kinds include:

• Express Contract (Formed with spoken words)
• Implied Contract (Formed with acts and conduct), and
• Quasi Contracts (Recognized by Law under special circumstances)

Types of Contracts on the basis of Execution:

There are two types of contracts on the basis of execution. These are:

• Executed Contracts (When both the parties have discharged their obligations)
• Executory Contracts (When both the parties have to perform their obligations)

What is an Unenforceable Contract?

An oral or written contract that is not enforceable in any court of law is called an unenforceable contract. The reasons behind its being unenforceable include ambiguous terms of the contract and its subject matter. In unenforceable contract, one party gets an unfair advantage over the other. Most of the oral contracts fall in this category because there are not enough proofs in case of any complication.

Can a Contract be changed once it has been signed?

A contract, once signed, can never be changed unless all the parties in the contract agree to change it. If any modification in a contract is required then both the parties must agree on the change under consideration followed by a reason that is permitted by the law to modify the contract. Some of these reasons are its extension, shortening, change in the number of items included in the contract, and change in the payment terms.

What is a Supplement to a Contract?

The supplement to a contract is an addition in the existing arrangements between the parties of the contract. This supplement to a contract is used only when both the parties do not intend to change the terms and conditions of a contract. Instead, they are willing to add some more terms and conditions.

Does an Addendum Override a Contract?

No, an addendum cannot override the contract because it is only an addition to the existing terms and conditions of an already valid contract. An addendum can be written after the approval of both the contracting parties. These are usually not easy to write and a legal expert is always hired for writing an addendum because it changes the specific clauses, sections, and terms of the contract.

Difference between an Addendum and Amendment in a Contract

Addendum and amendment are the most confused terms being used in contracts for the last few years.

Addendum: An addendum is an addition in the existing terms and conditions of a contract that is already enforced by law. An amendment is a change in the existing terms and conditions on approval of the contracting parties.

Amendment: Nowadays, amendments are being commonly used in all kinds of contracts. An addendum can easily become the part of a contract while the amendments can become after negotiation between the parties. An amendment can also be used for correction and improvement in the legal document while addendum is an addition.

What is a Contract Amendment?

Contract amendment means changing the existing terms and conditions outlined in the document. Amendments are used to add, remove, or update the contents of a contract to improve it and make it more valid. Contract amendments are often used when writing a new document or contract seems more difficult than it.

What are the three Key Elements of a Binding Contract?

A contract is legally binding if it fulfills all the requirements of being a valid contract. There are many requisites of a legally binding contract.

The top three key elements of a binding contract are:

1. Presence of an offer
2. Acceptance of the offer, and
3. Consideration

What are the 4 Elements of a Valid Contract?

The validity of a contract depends on the presence of the following four elements.

1. An Offer
2. Acceptance of that offer
3. The intention of the contracting parties to enter a legal relationship, and
4. Consideration mostly in the form of money.

7 Essential Elements of an Enforceable Contract

An agreement becomes a valid contract if it has all the essential elements that give it a legal value.

The 7 elements that make a contract enforceable are:

1. An Offer by a party and acceptance by the other party.
2. Agreement of both the parties on the same thing in the same sense.
3. An intention to create legal obligation.
4. There should be no influence and fraud for obtaining the consent of the parties.
5. Competency of the parties to enter the contract.
6. Presence of a lawful object.
7. A consideration usually in the form of money.

What is a Valid Contract?

A contract that fulfills all the requirements like the presence of an offer, acceptance, and presence of a valid consideration is called a valid contract. It is usually in the form of a written or expressed agreement between the parties for providing certain products or services.

How Can a Contract be declared Void?

A contract can be declared void if it is created to carry out an illegal act. Void contracts are not enforceable by law. Most of the contracts are declared void since creation while others are declared void after changes in the state laws or after these are performed. In simple words, we can say that a contract can be declared void if the terms and conditions of the contract are changed for performance of an illegal act.

What makes a Contract Null and Void?

A contract that violates the contract laws is called a null contract and void contract. A null and void contract is an illegitimate contract that is unenforceable in any court of law. A contract with missing essential legal elements is also called a null and void contract.

Is a handwritten Contract Legally Binding?

A handwritten contract is fully valid and enforceable if both the parties are willing to accept the terms and conditions outlined in it and sign it with their free consent. The validity of a handwritten contract also depends on the type of agreement and the circumstances. Some handwritten contracts are not enforceable in any court of law under certain circumstances. The handwritten contracts are also discouraged because these are easy to tamper with.

Do Contracts have to be notarized?

There is no need for a contract to be notarized unless it is required by the law. However, the contracts dealing with real estate are notarized to increase their legal worth and effectiveness. The private contracts dealing with the purchase and sale of goods do not need to be notarized. Even, there is no need of notary signature in most of the contracts.

How can a Contract be terminated?

A contract is terminated if one of the contracting parties fails to abide by the terms and conditions outlined in the contract. The other party receives the right to claim his loss through a court of law. If the contracting parties have already decided the termination of the contract after reaching a certain result, the contract will automatically be terminated after the desired results. Such types of contracts include an agreement from both the parties to terminate it at a certain point.

What makes a Contract Valid and Enforceable?

There are certain elements that make a valid and enforceable contract. Most of the people agree that the presence of two elements makes a contract valid and enforceable. These are the mutual agreement between the parties and exchanging something valuable.

From a critical point of view, there are seven elements that make a contract valid and enforceable. These are:

1. Presence of an offer and its acceptance.
2. Agreement of both the parties on the same thing in the same sense.
3. Intention to enter a contract.
4. Competency of the parties willing to enter the contract.
5. Free consent on entering the contract.
6. Presence of a lawful object, and
7. A valuable legal consideration in the form of monetary benefits.