Companies typically create a contract to formalize an agreement between two or more parties in regards to the rights and duties of each. This is supported by the exchange of cash, goods or something else of value, including a promise to perform. Contracts, including business contracts, are commonly divided according to type, which differ in one or more ways. These differences include whether the contract is enforceable, whether it is evidenced by a written document and whether or not a court would acknowledge its validity.
An express contract explicitly states – orally or in writing -- all elements of the contract, including a definite offer, an unconditional acceptance and consideration. Each party to the express contract is bound by contract terms that are set at the time the contract is made. An express contract differs from an implied contract in two ways: the manner is which mutual assent – the offer and acceptance -- is represented and the proof required that a contract exists.
Unlike an express contract, an implied contract relies on circumstances to indicate the mutual intent of parties to create a contract. For this reason, one party’s actions can imply the existence of a contract, rather than a promise stated in words, assuming the actions occur in the course of ordinary business dealings and suggest a common understanding. To create a valid implied contract, the conduct of the parties must indicate an unambiguous offer and acceptance, as well as a mutual intent to be bound by the contract. In addition, something of value must be given by both parties to the contract.
Executory and Executed Contracts
An executory contract has an act or obligation stipulated in a contract that has yet to be performed by one or more parties to the contract. For example, an equipment lease and a license to intellectual property are examples of executory contracts. For an executed contract to exist, all contractual obligations must have been performed according to the terms of the contract.
Bilateral and Unilateral Contracts
To form a bilateral contract, both parties to the contract promise to perform an act or to refrain from performing an act. In this case, one party’s promise is the consideration that’s exchanged for the promise of another party. In contrast, a unilateral contract exists if only one party makes a promise to perform. In this case, the offeror promises to perform an act if the offeree performs an act that he knows to be the foundation of an enforceable contract. For example, an owner of a missing ring -- the promisor -- announces she will pay a reward to anyone who returns the ring. A person -- the promisee -- finds and returns the ring. By returning the ring, the promisee became a party to the contract.
An unconscionable contract is one that unjustly favors the party to the contract who possesses superior bargaining power. Because a competent person would not accept the terms of an unconscionable contract, nor would an honest person enter into the contract, a court may refuse to enforce the entire contract or the portion of the contract that is unconscionable, or limit the application of the unconscionable clause.
A party with superior bargaining power writes an adhesion contract and the party with less power can accept or reject it. The “take it or leave it” contract terms may be included in a business contract where the consumer who purchases a good has neither negotiating power nor the ability to modify the contract terms. Common adhesion contracts include insurance, lease and automobile purchasing contracts.
The occurrence of an uncertain event -- a contingency -- triggers the execution of an aleatory contract. For example, a crop hail insurance contract is an aleatory contract, for which the sums paid by one party to the contract to another are unequal.
Void and Voidable Contracts
A void contract is not an enforceable contract in that it does not grant rights to any party to the contract, not does it impose obligations. In turn, a voidable contract is an enforceable contract that the courts treat as one that does not bind one party to its terms because that party was a victim of fraud at the execution of the contract. For example, one party to the contract may fail to disclose a material fact to the other party to the contract.
- Cornell University Law School: Express Contract
- Cornell University Law School: Implied Contract
- BusinessDictionary.com: Executory Contract
- In the Red: Executory Contracts -- What Are They and Why Do They Matter in Bankruptcy
- BusinessDictionary.com: Executed Contract
- Law.com: Bilateral Contract
- Study.com: Unilateral Contract
- Cornell University Law School: Unconscionable Contract
- Cornell University Law School: Adhesion Contract
- BusinessDictionary.com: Aleatory Contract
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