Types of Contract Agreements

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With their use of "herein" and "heretofore," it often seems as if contracts are written to confuse anyone who isn't a lawyer or judge. Whatever the reason, contracts are among the biggest offenders for using jargon. So, since contracts are used in most of the important areas of life, it's helpful to understand what they are, when you use them and the different types of contracts you might encounter.

What Is a Contract?

A contract is a legal agreement between two or more parties that specifies what each party is agreeing to do or not do. The parties could be individuals or entities of some sort, such as businesses, the government or a group of individuals, like the members of a class action suit. These are found in those long columns next to the magazine article you’re reading, that describe a lawsuit you can be a part of if you bought something years ago and can rustle up the receipt for it.

Although courts prefer that contracts are written, oral contracts are also legally binding, which means they will be upheld if taken to court. Of course, if a contract is oral, it must be proven to the satisfaction of the court that what is claimed was actually what was said. This can be tough to prove, which is why it's much better to have a written contract.

When You'd Need a Business Contract

There are many instances where you need a business contract. Any time goods are bought or sold, or you agree to provide services or products, or to buy services or products, you need a contract. Any time you are promising to do anything in business, a contract is a good idea.

However, it's understood that the contract must offer something of value. The purpose of a contract is to protect one or both involved parties. You don’t need protection, though, if something has little or no value. If you borrow a co-worker's stash of sales brochures, she’s not going to ask you to sign a contract stating that you promise to return them by end of day. (If she does, you probably shouldn't borrow from her again.)

Buying or selling company vehicles, securing health insurance for the staff and hiring a trainer to present a workshop are just a few examples where you'd need a contract. All of these situations involve valuable considerations.

What Are the Types of Contracts?

There are many different kinds of contracts, including those that are specific to certain industries, such as engineering contracts and construction contracts. Some overlap industries, but some do not. Listing all of them would not be possible and would likely result in omitting some accidentally. Most contracts, however, can be grouped into categories of types:

Unilateral or Bilateral: Whether a contract is unilateral or bilateral depends on who is doing the promising. Unilateral contracts are one-sided, where one party is making all the promises. (This is easy to remember because the prefix “uni” means one, as in unicycle versus bicycle.) If a man offers a reward for the person who finds his lost wallet, that’s a unilateral contract. He has made the promise to pay the reward, but someone has to take him up on it by finding his wallet. If someone does produce the wallet, that finder is accepting the contract, and the wallet owner must pay the reward. The finder never promised to do anything.

In a bilateral contract, both parties make promises. Real estate transactions are examples of bilateral contracts. The sellers offer to sell their house at a specific price and specify what else goes with the sale, such as appliances and window coverings. The buyers make a counteroffer by specifying that they will agree to buy the house at the sale price only if the sellers install new flooring in the dining room and kitchen, repair the nonworking stove burners and repair or replace the sump pump in the basement. The potential buyers submit a deposit check with their contract so the house will be held for them and not sold to anyone else. As long as the sellers do all the repairs, the buyers must buy the house or lose their deposit.

Valid or Voidable: A contract is considered valid if it meets all the qualities necessary to be a legal contract. If it's missing even one element, it’s considered voidable.

Express or Implied: Contracts are express when they clearly express the contract’s details and promises. Usually, these are expressed in writing, but an oral contract can be express, too, if both parties agree to what was said or it can be proven what was said, and it was clearly stated.

Implied contracts require some reading between the lines. For example, if you leave a ring with a jeweler to be resized, it’s reasonable to assume it will be returned to you in the same condition as it was in when you left it, only resized. Though the contract you sign to resize the ring may not mention that the ring contains three stones, it’s implied that the ring will still contain the three stones when you get it back. If a stone is missing, you can use the implied contract to get the jeweler to pay for your lost stone.

Executed or Executory: This one is straightforward. An executed contract is one that’s been completed. If you take your car to a tire dealer to have new tires installed, while the tires are being installed and you’re watching the news on the waiting room TV, the contract is executory. In other words, it’s still being executed. But when they bring your car around, you see the new tires on the vehicle, pay for the tires and installation and drive off, that contract has been executed. It’s done. Over. In the past.

Contracts Under Seal: Contracts used to be enforceable only if they contained a seal showing they were official. The seal often took the place of payment being offered since with the seal the parties were agreeing to the terms including any payment involved. This became impractical as the world became faster paced and crowded with all kinds of businesses and individuals entering into contracts. Today, the consideration offered is usually substituted for a seal in showing the validity of a contract. If you do encounter a contract under seal, it will probably not be considered valid.

What Is Contract Law?

Contract law is the body of civil law that concerns agreements made between entities or individuals. Contract law includes rules that must be followed to create valid contracts depending on the type of agreement you're making, and methods for challenging contracts that one party believes should be void for one of many reasons.

What are the 4 Elements of a Valid Contract?

To be considered a valid, legal contract that could be upheld in a court, the contract must meet four qualifications:

Be entered into voluntarily: Both or all parties must be agreeing to the contract voluntarily, not feeling unduly pressured, forced into a corner or having no other choice. Contracts can sometimes be deemed unenforceable when one party claims to have agreed “under duress,” meaning they were under extreme stress or an emotional environment and were coerced into signing.

Parties must be capable of judgment: This includes being of sound mind and not mentally ill, but also not of diminished capacity. For example, a person with a below-average IQ could be considered incapable of understanding a contract enough to be considered legally responsible.

Be legal: The actions or transactions in the contract cannot be illegal, such as drug dealing or theft. Some activities are illegal only in some states. So, for example, a lawyer might be able to challenge a contract using an old, obscure state law that is rarely enforced.

Include an offer, acceptance and consideration: At least one party must be offering something, and at least one party must accept the offer. Also, the contract must provide consideration. In contracts, consideration doesn’t mean being nice or mindful of the other party’s feelings. It means agreeing to something you wouldn’t otherwise do without this contract. It could mean agreeing to do an action or promising to pay when the other party completes the action stipulated in the contract.

Can Minors Enter Contracts?

Generally, minors cannot enter into contracts. This is why; when a person is "underage," a parent or guardian must sign for them in any legal circumstance. However, the definition of "underage" can vary. While 21 was once considered the legal age, most states have changed the legal age from 21 to 18. (Note, however, that the legal age in a state is not the same for every privilege. In most states where the legal age for entering contracts is now 18, the drinking age is still 21, and the minimum driving age is yet another number.)

You may occasionally see the term "infant" used in contracts and wonder, who would make a contract with an infant? But in legalese, the word "infant" can be used interchangeably with the word "minor." So, in states where the legal age is 18, a 17-year-old could be called an infant. Really. (Perhaps this term was coined by people who had teenagers and thought, “sometimes they sure do act like infants.”)

Exceptions to minor contracts: Usually, if a party enters into a contract with a minor, the minor can get out of it or void the contract by saying he didn’t understand what he was signing. There are a few instances, however, where minors cannot have a contract voided. These include:

  • Taxes: Minors often hold jobs, receive payment and owe taxes, which they can’t avoid any more than adults can. The same goes for any penalties involved.
  • Necessities: Usually, a minor can’t void a contract involving necessities like food, clothing, housing and sometimes vehicles.
  • Education: Minors who attend college but aren’t yet 18 can’t refuse to pay tuition unless they follow the rules and procedures for officially withdrawing from school within the stated deadlines. When a minor voids a contract, by law he has to give back anything that came with the contract. He can’t give back an education, though, so he has to pay.
  • Professional contracts: When a minor, such as an athlete or model, enters into a contract to endorse products and receives payment to do so, she can’t void that contract. First, such a minor likely has a manager or agent, so she can’t claim she didn’t understand what she agreed to do. Second, if such contracts could be voided at whim, the minor could do so any time another company offered him a better deal.

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About the Author

Barbara Bean-Mellinger is a freelance writer who lives in the Washington, D.C. area. She has written on business topics for afkinsider.com, smallbusiness.chron.com, Harbor Style Magazine, the Charlotte Sun and more. Barbara holds a B.S. from the University of Pittsburgh and has won numerous awards in B2B and B2C marketing.