Types of Contract

Akshara Rajesh, a Student of CMR School of Legal Studies has written this article “Types of Contract”.

INTRODUCTION

‘Until the contract is signed, nothing is real.’ – Glenn Danzig^[1]

A contract in the simplest term refers to the agreement between two or more parties which creates legally enforceable obligations upon the parties to fulfil their duties or terms of their negotiations. The word contract is derived from the Latin word ‘con’ which means together and ‘trahere’ which means ‘To draw or to pull.’ Thus, etymologically it means to bring together or to conclude a bargain.

According to section 2(h) of the Indian contract act, a contract is an agreement enforceable by law.^[2] An agreement in itself doesn’t constitute a contract. Only those agreements that are legally enforceable and also must fulfil the conditions that are mentioned under section 10 of the Indian Contract Act, 1872. Accordingly, all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.^[3]

Contracts can be of different types. There are many different types of contracts, and each one has unique terms and conditions that are related to the objectives of the parties who are negotiating it. Contracts can be categorised based on how they are created, if they are legal, what they are made of, how they were executed, and even if they are valid. Thus, contracts can be classified into varied types on the basis of:

• Formation of contract
• Validity of contract
• Nature of contract
• Execution of contract
• Digital contracts

TYPES OF CONTRACT:

VERBAL OR ORAL CONTRACT

“A verbal contract requires an offer, an acceptance of that offer, and consideration.”^[4]

These types of contracts are classified on the basis of the method of formation of the contract. Verbal or oral contracts are formed through oral communications and most of the negotiations happen face-to-face or via telephonic conversations. These types of contracts are recognised by the Indian Contract Act, 1872 and are indeed valid in India. However, they are difficult to assert in a court of law and possess’ problems in submitting proof and evidence, especially in case of breach of contract.

Alka Bose vs. Parmatma Devi & Ors, 2000^[5]: By pronouncing its decision in the case, the Supreme Court made the observation that oral agreements are enforceable in India. A sale contract may also be made orally. It is not essential that an agreement be in writing; rather, it is crucial that it fall under Section 10 of the Indian Contract Act. All agreements, whether oral or written, are legally enforceable if they meet the requirements outlined in Section 10.

T Jayaram Naidu vs. Yasodha and Ors 2007^[6]: While deciding a case concerning the specific performance of a contract, the honourable high court held that verbal contracts are legal in India as long as they fulfil the condition mentioned in the section of the 1872 act. However, the burden of proof is on the person who claims the existence of the contract. Thus, the case laid down a precedent on the question of the ‘burden of proof.’

WRITTEN CONTRACTS

Written contracts are the most common and prevalent type of contract. Several business, and personal agreements, sales contracts, treaties or national contracts are conveyed through written means. Moreover, They are tangible and avoid confusion as the parties can lay down their terms and conditions. There are many types of written contracts.

They include:

• Land contracts
• Sale of a good contract
• Contracts that last more than one year
• Contracts that you hold responsible for someone else’s debt
• Contracts relating to marriage etc.

Balfour v. Balfour, 1919: It laid the basis for contract law since it provided the impetus for the development of the legal reaction theory in contract law. According to the legal reaction principle, a first legal act will trigger a second legal act. According to Lord Justice Atkin, agreements between spouses, particularly those relating to personal family relationships and involving the provision of maintenance costs and other related capitals, are typically not classified as contracts because, in most cases, the parties do not intend to enter into an agreement that should be attending legal ends. As a result, a contract cannot be enforced by nature if the parties do not intend to enter into a legal relationship.

EXPRESS CONTRACTS

Contracts are valid only if it consists of an offer, acceptance and consideration. Each of these components is defined under section 2 of the Indian Contract Act, of 1872. In express contracts, each of these components is clearly visible and tangible. They are mostly in the form of written contracts. According to section 9 of the Indian Contract Act, 1872. In so far as the proposal or acceptance of any promise is made in words, the promise is said to be expressed.^[7]For example, A offers to sell his bike to B. B accepts the offer and they enter into a contract. This is an express contract.

Luxor Ltd. v. Cooper 1919^[8]: It is a case in point which laid the basis that an express contract will always be premier to implied contracts. According to the facts of the case, the plaintiff undertook to provide potential buyers for the sale of two theatres on behalf of the defendants in exchange for a £10,000 commission. After presenting potential buyers, the defendants refused to carry out the agreement, saying that it was ultra vires (outside the director’s and company’s authority) because it was negotiated with unapproved corporate staff. Although the Court found that the fact that each director had a personal stake in the deal rendered any attempt at ratification null and unlawful, the agreement could nevertheless be ratified.

IMPLIED CONTRACTS

Implied contracts are conveyed through gestures or actions or other verbal communications. Throughout our day, unknowingly we enter into many contracts most of which are implied in nature. Section 9 of the Indian contract act also recognises implied contracts and provides ‘In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.’^[9]

K.P. Chowdhary vs. State Of Madhya Pradesh: The court in this case held that contracts concluded by the government under article 299 of the Indian constitution shall be only through written and expressed contracts. If it is conveyed through implied contracts, then the governmental contracts would remain a dead letter. In this case, the appellant accepted the auction’s terms, there was an implied contract created in this situation, and the honourable court held that Article 299 of the Constitution did not apply to such an implied contract.

QUASI- CONTRACTS

“Nemo debet locupletari ex aliena jactura – No person should benefit from another person’s loss.”

The doctrine of quasi-contract is one of the basic concepts of Roman negotiation laws. It is a kind of fictional contract recognised by the courts wherein remedy is provided in case a dispute arises between two parties who do not have a contract. However, the Indian contract act has recognised quasi-contracts in the form of chapter V of the act speaks about certain relations resembling those created by contract.  They are classified from section 68 to section 72 of the 1872 act^[10]. They include:

• Section 68: Claim for necessaries supplied to a person incapable of contracting, or on his account.
• Section 69: Reimbursement of a person paying money due by another, in payment of which he is interested.
• Section 70: Obligation of person enjoying the benefit of the non-gratuitous act.
• Section 71: Responsibility of finder of goods.
• Section 72: Liability of person to whom money is paid, or thing delivered, by mistake or under coercion.

Craven-Ellis v Canon Ltd.^[11]: A corporation nominated the plaintiff as managing director. The other directors who had been removed from office for failing to purchase their qualification shares had made the appointment. The plaintiff also declined to accept his shares for qualification. Yet, he continued to serve as managing director and filed a lawsuit against the business for his agreed-upon compensation or for a reasonable compensation based on the doctrine of quasi-contract. The person was allowed compensation, wherein the court reinstated that there is an obligation to pay for the work done even if there is no binding contract between the parties. The courts established it as a rule of law.

E-CONTRACTS

Globally, the world has become digitized and paper-written types of contracts are taking the form of e-contracts. E-contracts are agreements that are legally enforceable wherein most of the negotiations, transactions and other activities pertaining to the conclusion of the contract happen digitally. Section 10-A of the Information Technology Act, 2000 provides for the validity of the e-contracts. Accordingly, ‘wherein a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose’^[12]. There are different types of e-contracts. They are:

• Shrink wrap agreements
• Clickwrap agreements
• Browse wrap agreements
• Scroll wrap agreements
• Sign–in wrap agreements
• Electronic signatures

LIC India v. Consumer Education and Research Centre^[13]: The Supreme Court held that “In dotted line contracts there would be no occasion for a weaker party to bargain as to assume to have equal bargaining power. He has either to accept or leave the service or goods in terms of the dotted line contract. His option would be either to accept the unreasonable or unfair terms or forgo the service forever.”^[14]

VALID CONTRACTS

Valid contracts are those that are legally enforceable in a court of law. Section 10 of the Indian contract act, 1872 provides for the preconditions to constitute a valid contract. They include:

• Free consent
• Competence to contract
• Lawful consideration
• Lawful object
• Not expressly declared void

Another important precondition is ‘consensus ad idem’ which means that the parties must be in consonance regarding the terms of the contract, that is meeting the minds of the parties.

Raffles v. Wichelhaus^[15]: Wherein two parties entered into a contract concerning the sale of the ship, each thinking about a different ship by the same name, the court held that contract was not valid. There was no consensus ad idem (meeting of minds).

VOID AGREEMENTS

Those agreements that are not enforceable by the court become void agreements. They do not take the form of a contract as they are void-ab-initio.

1. “Section 20: an agreement becomes void when there is a mistake of fact concerning an essential facet of the agreement.
2. Section 24: a contract with an illegal object or consideration is void.
3. Section 25: 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:  agreements in restraint of marriage are void.
5. Section 27: agreements in restraint of trade are void. 
6. Section 28: a contract is void if it is in restraint of legal proceedings.
7. Section 29: a contract is void if the meaning of the agreement cannot be made certain.”^[16]

Anderson Ltd v Daniel [1924] 1 KB 138: In this case, one of the parties to the contract attempted to sell artificial fertilizers without an invoice which was against the Fertilisers and Feeding Stuffs Act 1906. The court held that the contract was void-ab-initio.

VOIDABLE AGREEMENTS

Voidable contracts are those agreements that can be made valid at the option of one of the parties at whose behest the wrong was done. Also, In those situations where there was no free consent and consent was obtained under:

• coercion (Section 15)
• undue influence (Section 16)
• fraud (Section 17)
• misrepresentation (Section 18)

Here, the party against whom the consent has been wrongly taken has the option to make the contract void.

Bawlf Grain Co. vs. Ross (1917)^[17]: A drunken wheat farmer signed a contract but broke his obligations as the price of wheat rose. Any contract entered into when a party is intoxicated is voidable at the discretion of the aggrieved party, according to this landmark judgement.

ILLEGAL CONTRACTS

Contracts that go against the lawful object or any law prevalent in the land are called illegal contracts. Moreover, Section 10 of the 1872 act prohibits illegal contracts and provides that to constitute a valid contract there must be lawful consideration and a lawful object.

For example, A contracts with B to kill C. This is against the law under section 302 of the Indian Penal Code. Thus, the contract is illegal.

UNILATERAL CONTRACTS

Unilateral contracts as the name suggests are one-party contracts, more specifically only one party makes a promise to the general public, organisation or an individual person as such. This kind of contract consists of four main elements:

• Agreement
• Consideration
• Intention
• Certainty

They are of different types and include open contracts and insurance.

A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar (1916)^[18]: The Madras High court in this case laid down that even if the contract is unilateral there must be:

• Two parties to conclude the contract
• There must be consensus ad idem.

BILATERAL CONTRACTS

Bilateral contracts are the most common form of contract and they consist of two parties the contract. Here the contracts are formed by way of communication between the parties, in terms of offer and acceptance. However, it must be noted that the parties must be competent to contract.

Central Bank of India vs Manipur Vasant Kini^[19]: The Court of Appeal held that underlying a credit card or charge card transaction was a contractual scheme consisting of three separate bilateral contracts between (a) the credit company and the supplier (b) the credit company and the cardholder and (c) the cardholder and the supplier.^[20]

UNCONSCIONABLE CONTRACTS

These types of contracts are those that are one-party oriented and appear to be unfair or unjust to the other party. Usually, these kinds of contracts will not be entertained in a court of law.

ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board^[21]: The honourable Supreme court said that contracts were liable to be set aside when they were between private players and the state on the ground that it is unconscionable.

ADHESION CONTRACTS

These kinds of contracts are also called standard forms of contracts. Here, one party to the contract has an upper hand and establishes all the terms and conditions of the contract. The other party either has to adhere to it or leave the contract. He has no power of negotiating or makes any changes to the contract. Some of the advantages and disadvantages of these types of contracts include:

• Improving business efficiency
• Lowering transaction fees
• Risk for the buyers
• Sometimes arbitrary and unlawful

Olley v. Marlborough court ltd.: In this case, two people had booked a stay in a hotel. The payment of the bill was made and when they came to the room, there was a notice stating that the hotel will not be responsible for any loss of items. Subsequently, several items were stolen. The court held that the hotel was responsible for the loss of the parties, as here, even though there was a standard form of contract, the notice concerning the weaving of any liability must be provided before payment of the bill.

OTHER TYPES OF CONTRACTS

Apart from these general types of contracts, there are several other classifications based on business interests, mode of execution, project management, service etc. They include:

1. ALEATORY CONTRACTS: Exigency contracts fall under these types of contracts wherein the parties are not obliged to fulfil their duties until some specific event transpires. [eg. Insurance contracts]
2. OPTION CONTRACTS: These contracts give one party the option to later sign a new contract with a different party.
3. EXECUTORY AND EXECUTED CONTRACTS: They are classified on the mode of execution where in executory is one that is continuing and executed is one that is completed.
4. FIXED PRICE CONTRACTS: When the terms of the contract are fixed, the nature of work and other criteria are clearly expounded, they are called fixed price contracts.
5. TIME AND MATERIAL CONTRACTS: In these types of contracts, the services are acquired on the basis of fixed labour hours, wages, overhead, general expenses etc.
6. COST REIMBURSABLE CONTRACTS: Under this contract, the buyer is responsible for paying the seller’s actual expenses as well as a premium or profit.
7. TERMINATION CONTRACTS: These are also called the NOT TO EXCEED CONTRACT. They reduce customers’ risk exposure.
8. RETENTION CONTRACTS: Many professional services contracts, particularly consulting agreements, have retainers and retention contracts are based on the core principle that the client will pay a certain amount upfront in exchange for services within a predetermined time frame.
9. RECURRING SUBSCRIPTION CONTRACTS: In this kind of arrangement, clients will pay a set monthly charge for recurrent deliverables.
10. MANAGED SERVICE CONTRACTS: Largely used by consultancy firms or professional organisations.
11. UNIT PRICING CONTRACTS: They are also referred to as hourly-based contracts and include within their ambit both fixed-price contracts and reimbursable contracts.

CONCLUSION

Thus, this article attempts to expound on the various types of contracts. Contracts in the simplest term refer to agreements that are legally enforceable and they include within themselves many other conditions. Moreover, One contract can come within the ambit of several types of contracts based on their nature and characteristics. Thus, all the different types of contracts are equally important, with their own merits and demerits and are categorised by their unique features.

Also Read: Doctrine of Estoppel in Contract law.

^[1] AZ QUOTES, https://www.azquotes.com/quotes/topics/contracts.html (Last visited 24th March 2023).

^[2] INDIAN CONTRACT ACT, 1872, No.9, Imperial Legislative Council, 1872(India).

^[3] INDIAN CONTRACT ACT, 1872, No.9, Imperial Legislative Council, 1872(India).

^[4] GOOD READS, https://www.goodreads.com/quotes/tag/verbal-contracts-uk (Last visited 25th March 2023).

^[5] Alka Bose vs. Parmatma Devi & Ors [CIVIL APPEAL NO(s). 6197 OF 2000]

^[6] T Jayaram Naidu vs. Yasodha and Ors [2007 C.M.P.No. 1538 of 2006].

^[7] INDIAN CONTRACT ACT, 1872, No.9, Imperial Legislative Council, 1872(India).

^[8] Luxor (Eastbourne) v Cooper [1941] A.C. 108.

^[9] INDIAN CONTRACT ACT, 1872, No.9, Imperial Legislative Council, 1872(India).

^[10] INDIAN CONTRACT ACT, 1872, No.9, Imperial Legislative Council, 1872(India).

^[11] Craven-Ellis v Canons Ltd. (1936) 2 KB 403).

^[12] INFORMATION TECHNOLOGY ACT, 2000, No. 21, Act of Parliament, 2000 (India).

^[13] LIC India v. Consumer Education and Research Centre [1995 AIR 1811].

^[14] LIC India v. Consumer Education and Research Centre [1995 AIR 1811].

^[15] Raffles v Wichelhaus [1864] EWHC Exch J19.

^[16] INDIAN CONTRACT ACT, 1872, No.9, Imperial Legislative Council, 1872(India).

^[17] Bawlf Grain Co. vs. Ross (1917) 55 SCR 232.

^[18] A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar (1916) 36 Ind Cas 921.

^[19] Central Bank of India vs Manipur Vasant Kini [AIR 1999 Bom 409, 2000]. 

^[20] AIR 1999 Bom 409, 2000 

^[21] ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board, (Arising out of SLP (Civil) No.3307 of 2018).