First-Year Law Notes & Flashcards

TYPES OF CONTRACT 

A contract is a legally binding agreement between parties which has specific legal obligations, the breach of which will lead to legal consequences. The provisions of a contract are included in the Indian Contract Act, 1872. Section 2(h) of the Indian Contract Act, 1872 defines a contract as “an agreement enforceable by law is a contract”. Section 2 of the Act is an interpretation clause. A contract can be formed only with mutual consent and meeting of minds (Section 13 –  Consensus ad idem ).

The type of contracts differs on the basis of:

• Validity 

• Formation 

• Performance 

Types of contracts on the basis of formation of the contract

Contracts can be formed in several ways. The following are the types of contracts that can be classified on the basis on which they have been formed. 

Verbal contracts

Verbal or oral contracts are those which are formed by oral communication. From time immemorial, contracts have been made orally itself. But, because verbal contracts are difficult to prove in courts, these contracts are thus, generally not made anymore. Having said that, verbal contracts are valid contracts and enforceable by law, provided that they fulfil the conditions of valid contracts as given in  Section 10  of the  Indian Contract Act, 1872 . 

The validity of verbal offers and acceptance comes indirectly from  Section 2  of the Indian Contract Act. According to  Section 2(a) , a person is said to make an offer when they  signify  to another their willingness to do or not do something. Further,  Section 2(b)  states that the acceptance is given by  signifying  assent to the offeror. The term ‘signify’ plays an important role in showing that offers and acceptance can be given without actually writing it down.

Written contracts

Contracts that are formed in the written and tangible form are written contracts. These are the most prevalent types of contracts at present. When they fulfil the conditions of Section 10, they are valid contracts. 

Express contracts

Contracts are made of proposals or offers and acceptance of such proposals or acceptance. Proposals and the acceptance of the same can be express or implied. According to  Section 9  of the Indian Contract Act, a proposal when made in words is an express offer. Thus, an express contract is made in words, either verbally or through written form. For example, A asks B whether he would like to sell his house for an X amount. B agrees to the same by saying yes. This is an example of an express contract. Thus in an express contract, the terms of the contract are clearly  expressed .

Implied contracts

Section 9 also recognizes implied contracts. It states that an offer (or acceptance) made through anything else other than words is an implied offer (or acceptance). An implied contract is based on the actions, gestures etc. of the involved parties. For example, in an auction, raising the numbered paddle by the customer is an implied offer and the final bang of the gavel by the auctioneer when a product is sold signifies that the offer is accepted. This is thus an example of an implied contract. A warranty on a product is another example of an implied contract. When you buy a product, you get a warranty that it will work as expected and advertised. This contract is implied since it came into force when someone made a specific action (purchasing a good), even if it wasn’t written down elsewhere.

Just like express contracts, there must be a meeting of the minds of both parties. It is much more difficult to ascertain the meeting of minds in a contract when terms and conditions of the same are not explicitly mentioned. Courts have very often refused to recognize implied contracts wherein meeting of minds cannot be ascertained with clarity.

Quasi-contracts

Sometimes, rights and obligations might arise not by contracts that the involved parties have assented to, but rather by law. These create legal relations that resemble contracts and are called quasi-contracts, with the word “quasi” meaning “seemingly”. Chapter V  of the Indian Contract Act talks about ‘Certain relations resembling those created by contract’. This part is on quasi-contracts, even though the Act does not mention the term ‘quasi-contract’ anywhere.

The fundamental rationale behind quasi-contracts is the theory of unjust enrichment, although this is not a settled principle. This theory prevents one party from being unjustly enriched at the expense of another. So even without a contract, in the name of justice and equity, obligations can be made to arise.   

Chapter V spans from Section  68 – 72 . Section 68 states that if a person is not competent to contract (say a person A) and then that person or anyone dependent on that person is supplied with necessaries of life, then the person (say, a person B)  supplying the same will be entitled to reimbursement from the property of the incompetent person. So, even though no contract is there between A and B, B can ask for compensation or reimbursement so that they are not negatively affected.

Section 69  creates a contract of guarantee in the absence of one. The contract of guarantee is a contract wherein one person, the guarantor promises to the other, the principal debtor that the former will pay the debt of the latter if the need arises. But, this Section protects the rights of the guarantor in the absence of a contract of guarantee. So if person A is in debt to B and another person C pays B on behalf of A, then C will be entitled to be reimbursed even when A and C had not agreed in advance that C would pay off A’s debt.

Section 70  provides for obligations of a person benefiting from a non-gratuitous act, while  Section 71  talks about the obligation of the finder of goods, who must take adequate steps to find the owner. Finally, Section 72 says that a person to whom money or anything else has been delivered, either by mistake or coercion, must repay or return it.   

E-contracts

The term “electronic contract” refers to a contract that is made through e-commerce, with the parties rarely meeting in person. It refers to electronic commercial transactions that are undertaken and completed. A consumer using an ATM to withdraw money is an example of an electronic contract. When a person orders goods through an online shopping website, this is an example of an e-contract. The spread of technology and globalisation has expedited the presence of e-commerce enterprises around the world. Online auctions are also becoming more common, where people may purchase and sell items by bidding on them over the Internet.

The Indian Contract Act does not explicitly recognize e-contracts. At the same time, it does not prohibit them as well. Indian courts have recognized e-contracts but they must fulfil the essentials of a valid contract under Section 10, especially the condition of free consent which is very often marred in e-contracts.  

The legal basis of e-contracts can be somewhat drawn from the  Information Technology Act, of 2000  and the  Indian Evidence Act, of 1872 . The IT Act recognises that proposals, acceptances, and revocations of proposals and acceptances, as the case may be, can be expressed in electronic form or utilizing an electronic record and that such electronic form or means shall not be deemed unenforceable, solely because such electronic form or means was used for that purpose.

The Indian Evidence Act extends recognition to computer output, which is defined as any information contained in an electronic record that is written on paper, stored, recorded, or reproduced on optical or magnetic media produced by a computer (hereinafter referred to as the computer output). Without further proof or production of the original, such information in compliance with  Section 65B  shall be acceptable in any proceeding as evidence of any contents of the original or any fact stated therein of which direct evidence would be admissible.

Types of contracts on the basis of validity of the contract

Too often problems arise with contracts and the courts must judge whether they are valid or not in the first place. Based on developed jurisprudence and the laws, contracts can be valid and when invalid, can be void, voidable or void-ab-initio.

Valid contracts

Section 10 provides for certain essentials as follows, which all contracts must fulfil to be considered valid: 

1. There must be free consent between the parties involved.
2. The parties must be competent to contract.
3. The consideration and object of the contract should be lawful.
4. The contract must not be declared void under the law.

These essentials when present make a valid contract. Other than these essentials, certain other things also need to be fulfilled for the contract to be recognized by courts. Firstly, there must be a meeting  of the minds  of the parties involved. This means that the parties involved must agree on the same things in the same sense. For example, suppose person A sees a clock belonging to B, and wants to buy it. The clock is actually metal but because of its design, it seems wooden. A, believing it’s a wooden clock, offers to buy it and B agrees. In this situation, B knows that it is a steel watch and believes he is selling the same while A believes he is buying a wooden clock. In the very object of the subsequent contract, there is no meeting of the minds and this is thus, not a valid contract.

Another way where contracts do not have sufficient meeting of minds is when the terms are not clearly specified and are open to interpretation. If someone offers to buy a house for a “desirable amount” and the owner agrees, there is no contract because the concept of a “desirable amount” is very subjective and open to interpretation. 

A valid contract gets formed only when there is an intent to create legal relations. Otherwise, it remains simply an agreement and cannot be enforced by law. Further, the performance of a valid contract should be possible. So a contract for reviving a dead person is not a valid contract. 

Void contracts

Section 2(j)  says that a contract that ceases to be enforceable by law is void from the moment it becomes unenforceable. The term “void” in law means “not legally binding” or “invalid. 

A contract becomes void when it is unable to fulfil the conditions mentioned in Section 10. Thus, when parties are incompetent to form a contract, like minors or people of unsound minds, then the contract becomes void. Further, the impossibility of performance also makes contracts void.

Apart from the above, the following are certain other conditions of void contracts:

1. Section 20  states that an agreement becomes void when there is a mistake of fact concerning an essential facet of the agreement. It is important to note that a mistake of law does not make a contract void nor does a one-sided mistake make it void.
2. According to  Section 24 , a contract with an illegal object or consideration is void.
3. Section 25  states that an agreement without consideration is void unless it is in writing and registered, or is a promise to compensate for something done or is a promise to pay for a debt barred by limitation law.
4. Section 26  says that agreements in restraint of marriage are void.
5. Section 27  says agreements in restraint of trade are void. 
6. Section 28  makes a contract void if it is in restraint of legal proceedings.
7. Section 29  makes a contract void if the meaning of the agreement cannot be made certain.

Voidable contracts

Voidable contracts are those contracts that can be made void on the will of one of the parties. In these scenarios, generally, consent is not free and it is obtained under coercion ( Section 15 ), undue influence ( Section 16 ), fraud ( Section 17 ) and misrepresentation ( Section 18 ). Here, the party defrauded or unduly influenced has the option to make the contract void. 

Void-ab-initio contracts

They are a special type of void contract that means “void from the very beginning”. In essence, void-ab-initio contracts are those contracts that never existed from the moment of their inception. 

Unenforceable contracts

If a contract is found to be unenforceable, the court will not order one party to act or compensate the other for failing to meet the contract’s requirements. While the elements of an enforceable contract (offer, acceptance, and consideration) appear straightforward, there are severe enforceability standards. A contract can be declared void for a variety of reasons, including the circumstances surrounding the signing, the contents of the agreement, or events that occur after the contract is signed.

Lack of capacity, duress, undue influence, deception, nondisclosure, unconscionability, public policy, mistake, and impossibility are all typical defences to contract enforcement. If these conditions are present, a contract that is otherwise lawful may be rendered unenforceable. In essence, these contracts can be enforced with the consent of both parties but cannot be enforced legally in courts.

Illegal contracts

Contracts that violate the law of the land are illegal contracts. Section 10 states that the object or consideration of a contract should not be unlawful. Thus, Section 10 prohibits illegal contracts. For example, contract killings facilitated by contracts for murder are illegal as murder is a crime under  Section 302  of the Indian Penal Code.

Types of contracts on the basis of nature of the contracts

The nature of the contract is diverse and specific to the parties involved. On the broad level, they can be classified as unilateral, bilateral, unconscionable, adhesion, aleatory and option types. All contracts more or less fall under at least one of these broad categories. 

Unilateral contracts

As the name suggests, unilateral contracts are those contracts where only one party makes a promise. The other party is not specified and the contract gets completed by performance. The offeror cannot be asked to fulfil the offer until performance is made by someone. The offer made is a general offer. General offers are types of offers that are made to the world at large and their acceptance need not be communicated for it to constitute as valid acceptance under law.  Section 8  of the Indian Contract Act validates general offers and hence unilateral contracts saying that acceptance done by performing the conditions in a proposal or acceptance by receiving consideration is valid acceptance. 

Bilateral contracts

These are the contracts where reciprocal promises are made by the parties involved. Thus, parties involved are fixed and the contract is formed by way of communication of offer and acceptance. These are also called two-sided contracts and are the most common type of contract in use.

Unconscionable contracts

An unconscionable contract is one that is clearly one-sided and unfair to one of the parties involved and hence cannot be enforced by law. If a lawsuit is brought against an unconscionable contract, the court will very certainly declare it void. There are no monetary damages awarded, but the parties are released from their contractual duties. It is up to the courts to determine whether or not a contract is unconscionable. They frequently deem a contract unconscionable, if it appears to be a contract that no mentally capable person would sign, that no honest person would propose, or that would jeopardise the court’s credibility in the jurisdiction where it was enforced. 

Adhesion contracts

An adhesion contract, sometimes known as a “boilerplate” contract or a “standard form” contract, is a contract between two parties in which one party (the one with greater bargaining strength) establishes all or most of the contract’s provisions. The opposite party (the one with less bargaining strength) has little or no leverage to reach an acceptable agreement. Adhesion contracts eliminate the need for individually tailored contracts for each customer. Although adhesion contracts have the potential to boost efficiency and speed up the purchasing process, their use is controversial due to some of the possible benefits and drawbacks. Non-negotiable clauses are included in adhesion contracts, which are effectively “take it or leave it” contracts. In most nations, adhesion contracts are lawful, but they are frequently reviewed by courts before being enforced. The parties who drafted the contract frequently do so in such a way that any costs associated with the loss or damage of the products being purchased are borne by the buyer. The goal of the courts is to protect the bargaining party against unconscionable or unjust conditions.

Aleatory contracts

This is a type of contract where the parties involved do not need to perform a contract until a specific event occurs. These events are generally those which cannot be controlled by the parties involved. The most common type of aleatory contract is an insurance contract. Here, insurance premiums are paid without any kind of performance from the insurance company. Only when a specific event occurs, like for example, car damage with respect to car insurance, only then will the company be obligated to pay. More often than not, the amount of insurance premium paid in total is not equal to the insurance that is being paid by the company. Sometimes the amount of insurance premium is much more than the insurance that the company pays while some other times, the premium is very less compared to the huge amount of insurance that the company has to pay.

Option contracts

Option contracts enable one party to enter into a new contract with a different party at a later date. Exercising the option means entering into a second contract, and a common illustration of this is in real estate, where a prospective buyer will pay a seller to remove a property from the market, then have a new contract formed to buy the property outright at a later date if they desire.

Types of contracts on the basis of execution of the contract

Contracts can be executed or performed immediately or over a period of time. The important thing for consideration is the time frame for the fulfilment of the promise. On the basis of this time frame, contracts may be executory or executed.

Executory contracts

These are contracts that are continuing in nature. For example, a lease agreement. Here, throughout the term of the contract, the owner would allow the tenant to stay in the former’s property and the tenant would pay monthly rent. 

Executed contracts

These are contracts whose obligation has been fulfilled. So the purchase of a product or service is an executed contract.

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