Types of Contracts
A contract is a legal agreement binding two parties that defines what can and what cannot be done by either party. This agreement is enforceable by law and provides legal protection to both parties in case of a potential business deal. The purpose of a contract is:
Establish the agreement made by the parties
Fix the rights and duties of both entities in accordance with the agreement in the contract
There are many kinds of contracts that are classified on the basis of mode of creation, its enforcement, and the extent of its execution. In this article, we will consider the types of contracts that are based on their enforcement or validity.
Classification of Contracts
Contracts are broadly classified into three different categories, as follows:
Contracts Based on the Validity or Legal Effects – Contracts that are based on legal implications fall in this category of contracts.
Contracts Based on Performance or Execution – The signing parties perform their duties based on the contractual agreement, and contract execution is the process that defines it.
Contracts Based on Formation or Mode of Creation – When a contract is created, various aspects are taken into consideration, like whether it is a written contract or not, etc.
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Contracts Based on Validity
Contracts are divided into five types based on their enforcement/validity:
The valid contract definition says it is a contract that is enforceable by the law. For a contract to be enforceable, it has to meet the requirements of section 10 of the Indian contracts Act 1872, which are:
A lawful offer and acceptance must exist to form a valid contract. In section 2(a), the definition of an offer is specified. Section 2(b) states that after an offer is accepted, it becomes a promise.
There is a lawful consideration to it, which is defined in section 2(d). Consideration is something to be given in return to the promisor and is the foundation of every contract. Without consideration, the contract does not exist. The consideration should not be immoral, unlawful, or against public policy.
The Signing Parties Must be Competent, which is Defined as:
They must be a major, i.e. 18 years or above.
They must possess a sound mind.
They are not disqualified by the law.
Parties have free consent, as defined in section 14 of the act.
Let Us Clarify this With a Valid Contract Example Given Below:
X says to Y that he will sell his car to him for Rs.1,00,000. This is a valid contract if:
X wants to sell it, not under any influence.
Consideration of X to sell the car is free.
If Y accepts the offer, then there is acceptance.
The void contract has been defined under section 2(j) of the Indian contracts act, 1872. A void contract was once a valid contract, but it has become void now due to changes in some of the original conditions. There is no obligation or rights concept in a void contract and is not enforceable by either the parties. These contracts are not covered by the law and cannot be made valid even if both parties consent.
Section 24 to 30 Defines the Following Types of Void Contracts:
Any agreement in which one party is restricted to enforce their legal rights is a void contract. These legal rights arise under the contract as per the usual legal proceedings in the ordinary tribunals.
Any agreement where there is a limit on the time of enforcing the contract rights
Agreements that are unlawful in parts
Agreements in Restraint of Marriage– Any agreement (apart from involving a minor), where there is restraint in marriage, is a void agreement.
Agreements in Restraint of Trade– Any agreement which restricts a lawful trade or profession is considered a void contract.
Wagering or gambling agreements.
A voidable contract has all the elements of a valid and enforceable contract but has some flaws that could enable either party to void it. In such a contract, either of the parties has a choice of avoiding their duties. Some of the examples where a void contract becomes voidable are:
Either of the parties is a minor.
There is an injured party involved.
The consent of one party was not free.
One party was suffering from a legal disability.
Any of the parties was a victim of fraud at the time of execution of the contract.
The difference between valid and voidable contracts is that a void contract is not enforceable by law at any cost, but a voidable contract is treated as void only if a party chooses to treat it as voidable by opposing the enforcement of the contract.
An agreement may be unlawful or illegal, as outlined in section 23 of the act. A contract that breaks some rule that is criminal or is against public policy is deemed as illegal.
One must distinguish between a void and an illegal contract. An illegal contract is one whose consideration is forbidden by the law, while in the case of a void contract, the law only says that the court will not enforce it in the event it is made. By this definition, all illegal contracts are void, but not all void contracts are illegal.
These contracts are good in substance, but due to some technical flaws, they are not enforceable by the law. The flaws could be:
Absence of writing
Absence of proper stamp
Time-barred due to the law of limitation
Ambiguous terms of the contract
One of the parties has a voidable contract.
Such contracts cannot be enforced against any of the parties involved. Let us consider an unenforceable contract example to understand it better:
Let us say there is a contract where parties negotiate to sell paper clips for 10 Rs. But due to a printing mistake, the contract says 100 Rs. In this case, the contract would be declared unenforceable and would need to change to conform to the original intent of both parties.
How to Prepare for a Test on Types of Contract in Commerce
Go through Types of Contracts Based On Validity – Explanation, Classification, and FAQs on Vedantu
Read the entire page and then make mini notes on topics that matter
Follow the sequence while jotting down important pointers from the page
Refer to your course textbook in addition to this page and see if all the points have been covered
Write everything down in your own words instead of copying and pasting
Highlight all the key portions using a colored pen
Revise from this page to clear any doubts and also before an exam so as to score well
Vedantu provides free-of-cost study material on Types of Contracts for Commerce students. Vedantu is India’s topmost online tutoring portal that has quality study material on its website. The study material on Vedantu has been designed keeping in mind the board’s general guidelines and so, students and parents can rest assured that they are preparing for the examinations in a proper manner. The matter is free of cost and can be accessed by downloading in the form of a PDF as well.
FAQs on Types of Contracts Based on Validity
1. What is meant by Under Influence for Contracts?
Under the influence means that one party can affect the decision of another party due to the relationship they share. The most common reason for under influence is that one of the parties has a position of power over the other. There could also be emotional ties that could cause an influence. The individual who has more power could coerce the weaker party to agree to the contract which may not be in the long-term interest of the weaker party.
2. What is the contract of the agency?
The contract of the agency is based on the principle that one of the persons involved in the contract cannot perform all the transactions. In such a case s/he can appoint someone else to act on his/her behalf. Agency acts as a relationship between two people where the agency can bind another person into a legal relationship with a third party.
The Contract of the Agency has Two Parties:
Principal– The person who employs another person to perform on his behalf is the principal.
Agent– The person who is employed by the principal to represent him or her while dealing with the third party is called the agent.
The diagram below represents the fundamental characteristics of the contract of agency:
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3. Do all mistakes in a contract make it unenforceable?
There Could be Two Kinds of Mistakes That Can be Made While Forming a Contract:
Unilateral Mistake – This is one-sided and made by one of the parties. For example, the mistake in the value of an item can make a contract unfair and give an advantage to a party.
Mutual Mistake – If both the parties make a mistake, like a mistake made in the identity of an item, then the contract can still be void.
Mistakes in contracts are usually considered per case basis and depend on whether it is a significant (material) mistake or under influence. Mistakes are not definitive, and the matter is generally taken to court to understand if the contract is unenforceable or not.
4. How can students make notes on Types of Contracts?
All students of Commerce can refer to Types of Contracts Based On Validity on Vedantu. This page in itself is quite informative and has a lot of inputs on types of contracts. This can be referred to even while making notes as it acts as a comprehensive guide right before the exams. The different types of contracts are well explained on the page and can be understood well if one just goes through it carefully. It is an important chapter in Commerce.
5. How do students know about a void contract?
A void contract was once a valid contract. Some alterations in its original condition have resulted in it being declared void. Void contracts have been well explained if the students log into Vedantu’s portal and go to Types of Contracts. This page is quite useful when it comes to preparing before an exam. All students must go through this page once right before they have an exam as it has the relevant content that they need to know. It has been created by some of the most credible Commerce teachers.
6. Is an illegal contract the same as an unenforceable contract?
Any contract that breaches some rule or is against public policy is considered illegal. An unenforceable contract is good but on account of technical flaws, it cannot be enforced by the law. These stark differences between both have been clarified in Types of Contracts Based On Validity that are on Vedantu. This page is an ideal guidebook for students who wish to study. The different types of contracts have been described here because of which the students can easily learn the concepts.
7. Will questions come from the topic Types of Contract in Commerce exams?
Yes, questions from all the chapters that the students have in Commercial Studies will come for the tests. The chapter on Types of Contracts is crucial and probable questions that may come from here have been covered on Vedantu. If the students read this page, they will be able to familiarize themselves with everything that they may be asked during the exams. The page has all the topics covered so, students will not feel anxious prior to appearing for their Commerce exams.
8. Where can students read about the classification of contracts?
Students can read from Types of Contracts Based On Validity on Vedantu so as to learn more about the topic. The classification of contracts is done on the basis of various parameters. All of this is included on the page and should be read once so as to clarify one’s doubts. This page is ideal for studying and revising. All students who read from this page will feel much more prepared than they would have otherwise been. Contracts are an important chapter in Commerce and need to be understood well. Students should make an active effort towards understanding the different concepts rather than trying to mug up whatever’s on the page.