Handout Types of Contract

DEFINITION OF CONTRACT
A contract is a legally binding agreement, that is, an agreement which will be enforced by the
courts. Salmond defines contract as, “an agreement creating and defining obligation between
the parties.” Halsbury defines a contract to be, “an agreement between two or more persons
which is intended to be enforceable at law and is constituted by the acceptance by one party
of an offer made to him by the other party to do or abstain from doing some act.”
Agreement
An agreement gives birth to a contract. An agreement is defined as, “every promise and every
set of promises forming consideration for each other.” (Section 2(e)). A proposal when
accepted becomes a promise. Thus an agreement is an accepted proposal. An agreement
comes into existence only when one party makes a proposal or offer to the other party and
the other party signifies his assent thereto. In short, an agreement is the sum total of offer
and acceptance
CLASSIFICATION OF CONTRACT
From the point of view of enforceability
Valid Contract : A valid contract is one which satisfies all the requirements prescribed by law
for the validity of a contract, i.e. the essential elements laid down in Sec.10. A valid contract
creates in favour of one party a legal obligation binding upon the other.
Void Contract : A contract which was legal and enforceable when it was entered into may
subsequently become void due to impossibility of performance, change of law or other
reasons. When it becomes void the contract ceases to have legal effect. In other words, a void
contract is not valid from its inception but subsequent to its formation, it becomes invalid and
destitute of legal effect because of certain reasons. [Sec. 2(j)]
Void Agreement : “An agreement not enforceable by law is said to be void.”— Sec. 2(g). A
void agreement has no legal effect. It confers no rights on any person and creates no
obligations. An agreement made by a minor; agreements made without consideration (except
the cases coming under Sec.25); certain agreements against public policy; agreements in
restraint of trade or in restraint of marriage or in restraint of legal proceedings, etc. are
examples of void agreements.
Voidable Contract [Section 2(i)] : A voidable contract is a contract which can be avoided or
set aside at the option of one of the parties to the contract. It can be set aside at the option
of the party defrauded. Until it is avoided or rescinded by the party entitled to do so by
exercising his option in that behalf, it remains valid. But the aggrieved party must exercise his
option of rejecting the contract (i) within a reasonable time and (ii) before the rights of third
parties intervene, otherwise the contract cannot be repudiated.
Example- X threatens to kill Y if he does not sell his new Ambassador car to X for Rs.12,000. Y
agrees. The contract has been brought about by coercion and is voidable at the option of Y,
i.e. the aggrieved party. A, with the intention to deceive B, falsely represents that fifty lakh
bulbs are made annually at A’s factory, and thereby induces B to buy the factory. The contract
has been caused by fraud and as such is voidable at the option of B.
The Indian Contract Act has laid down certain other situations also under which a contract
becomes voidable. They are :
-When a contract contains reciprocal promises, and one party to the contract prevents the
other from performing his promise, then the contract becomes voidable at the option of the
party so prevented (Sec.53).
Example : A, contracts with B that A shall repair B’s house for Rs.1000. A is ready and willing
to execute the work accordingly, but B does not supply him material and thus prevents him
from doing so. The contract is voidable at the option of A. When a party to the contract
promises to do a certain thing within a specified time, but fails to do it, then the contract
becomes voidable at the option of the promises, provided at the time of entering into
contract, the intention of the parties was that the time would be the essence of the contract
(Sec.55).
Example: A contracts with B that A shall whitewash B’s house for Rs.1000 within fifteen day.
But A does not turn up within the specified time. The contract is voidable at the option of B.
Difference between void and voidable contracts : A void contract is one which is
unenforceable by law. It has no legal existence and, therefore, is destitute of legal effect,
whereas a voidable contract is that agreement which is enforceable by law at the option of
aggrieved party thereto, but not at the option of the other or others. It is valid so long as it is
not rescinded or impeached by the party entitled to do so, i.e. the aggrieved party. If the party
fails to use his right of avoidance within a reasonable time, the agreement would be binding.
Classification from the point of view of creation

Express Contract : Contracts entered into between the parties by words spoken or written,
are termed as express contracts. For example, if X tells Y on telephone that he offers to sell
his house for Rs.20,000 and Y in reply informs X that he accepts the offer, there is an express
contract.
Implied Contract : Where the offer or acceptance is made not by words, written or spoken,
but by acts and conduct of parties, it is termed as an implied contract. Thus, where X, a coolie,
in uniform takes up the luggage of Y to be carried out of a railway station without being asked
by Y, and Y allows the coolie to do so, the law implied here that Y agreed to pay for the services
of X, and there is an implied contract between X and Y. Similarly, when A takes a seat in a bus,
an implied contract comes into being—a contract according to which A will pay the prescribed
fare to the conductor (i.e., the agent of the bus company) for taking him to his destination.
From the point of view of extent of execution or classification according to performance
Executed Contract : An executed contract refers to that contract in which both the parties
have fulfilled their respective obligations. In other words, an executed contract is one where
nothing remains to be done by either party. Example: X agrees to paint a picture for Y for
Rs.20. When X paints the picture and Y pays the price, it becomes an executed contract.
Executory Contract : An executory contract refers to that contract in which both the parties
to the contract have yet to perform their respective obligations. In the example referred to
above, the contract is executory, if X has not yet painted the picture and Y has not paid the
price. Similarly, if A agrees to engage M as his servant from the next month, the contract is
executory.
A contract may sometimes be partly executed and partly executory. Thus if Y has paid the
price to X and X has not yet painted the picture, the contract is executed as to Y and executory
as to X.
On the basis of execution

Unilateral Contract : A contract is said to be unilateral where one party to a contract has
performed his share of obligation either before or at the time when the contract comes into
existence. It is only the obligation of the other party which remains outstanding at the time
of formation of the contract. Such contracts are also termed as contract with executed
consideration. Thus, a contract of loan, where money has been advanced by the creditor is an
example of unilateral contract, because the creditor has done what he was to do under the
contract, it remains for the debtor to repay the debt.
Bilateral Contract : In a bilateral contract obligations of both the parties are outstanding at
the time of the formation of the contract. They are, executory contracts or contracts with
executory consideration. In other words, in a bilateral contract, there is only a promise for a
promise. For example, where X promises to sell his car to Y after 15 days and Y promises to
pay the price on the delivery of the car, the contract is bilateral as obligations of both the
parties are outstanding at the time of formation on the contract.

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DEFINITION OF CONTRACT

Classification from the point of view of creation

On the basis of execution

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