Contracts are a crucial aspect of business. Almost any transaction you engage in, from purchasing items for your office to signing a lease for a startup, will involve a contract in some way or another. Contracts define the terms and conditions between two parties and are legally binding agreements that all parties must abide by.
Contracts can differ widely depending on their purpose. What are the various types of legal contracts you're likely to encounter when conducting business? Let's take a closer look.
Express contracts refer to agreements made in writing or through a verbal agreement between two parties. When written, these types of contracts serve as a clear record of the terms of the agreement and are easier to interpret when disagreements arise.
Implied contracts are less formal but just as legally binding. They exist when two parties act in a certain way and establish terms and conditions through their actions, even if there is no formal verbal or written contract. For example, if you have a contractor come to your home to complete a project, the fact that you allowed them onto your property to perform the work is enough to establish an implied contract.
Some critical differences between implied and express contracts include:
Understanding the differences between implied and express contracts is crucial in avoiding legal disputes and conflicts. While both types of contracts are legally binding, having all contracts in writing is always advisable. Doing so ensures that the terms and conditions are clearly defined and that both parties agree and are fully aware of their obligations and duties. This helps prevent disputes and keeps everyone on the same page, ensuring that the agreement is carried out as intended.
Unilateral contracts exist when one party makes a promise, and the other party accepts that promise by performing the required action. For instance, you may offer to reward someone for finding your lost pet. If that person finds and returns your pet, you must fulfill your end of the agreement by paying the reward.
Bilateral contracts involve an exchange of promises between two parties, where each party must fulfill their end of the bargain. For instance, when you purchase goods from a store, you agree to pay a certain price, and in return, the seller agrees to provide the goods.
Some of the key differences between unilateral and bilateral contracts include:
While unilateral contracts are more flexible, bilateral contracts provide more legal remedies for both parties in case of breach. To ensure the interests of your business are protected, it’s essential to understand which type of contract you are entering into before committing to specific obligations.
An adhesion contract is an agreement that exists when one party has all the bargaining power and presents the accepting party with a "take it or leave it" offer. This practice is common in insurance contracts, employment contracts, and software agreements. The accepting party must abide by all the terms or face financial or legal consequences.
Adhesion contracts typically favor the party with more bargaining power, leaving the other party with little to no room for negotiation. This disadvantages the weaker party, as they must agree to the terms if they want to do business. Although adhesion contracts are legal, some companies have used this type of contract to exploit their customers. Hence, many jurisdictions have implemented laws that regulate the use of adhesion contracts.
That's not to say adhesion contracts can't be a valuable tool if used responsibly. In some situations, this type of contract is the most efficient way to conduct business, particularly for any company that offers standardized products or services. For example, a software company can employ an adhesion contract to ensure that customers only use software for its intended purpose.
To avoid any potential issues with adhesion contracts, businesses should consider the following:
Option contracts give one party the right but not the obligation to enter into a contract on a future date. These types of contracts are frequently used in securities and commodities trading, as they offer the holder an opportunity to amplify gains in a favorable market.
There are two main types of option contracts:
The predetermined price established by an option contract is called the "exercise price." These types of contracts are also time-sensitive and stipulate a date by which the holder must exercise the option or see it expire.
In a fixed-price contract, the buyer and seller agree to a set price for a specific product or service. This contract is used when the scope of work, timeframe, and deliverables are well-defined. The agreed-upon price does not fluctuate, even if the vendor's costs increase or the project takes longer than expected.
This type of contract offers benefits to both the buyer and the seller. For the buyer, a fixed-price contract is a simple contract that provides financial predictability and stability. They know precisely what they will be paying for the product or service, which allows them to budget and plan accordingly. For the seller, a fixed price contract can be less risky because they can accurately calculate their costs and profit margins. Additionally, if the contract work is completed on time and within budget, the seller may be able to complete more work for other clients.
However, should a project take longer than expected, a fixed-price contract could cost the seller more money than anticipated. Additionally, changes to the scope of work may occur, resulting in additional costs for the seller. It is essential to clearly define the scope of work and deliverables in the contract to mitigate these risks. A buyer should consider including incentives for the seller to complete the work on time and within budget.
Any type of contract can be deemed unconscionable when one party has undue bargaining power and uses it to gain an advantage over the other. These types of contracts are considered invalid by law, and the party with the weaker bargaining power can dispute the terms of the agreement in court.
One typical example is a contract with a clause waiving a person's right to sue for damages. This is especially common in employment contracts where an employee must sign a document that waives their right to a jury trial or class action lawsuit. Another example is a contract that includes complex and obscure language that is nearly impossible for the average person to understand. Some other red flags for unconscionable contracts include contracts with highly oppressive terms, such as requiring an excessive penalty for a breach of contract, requiring one party to give up a fundamental right, or failing to disclose important information or material facts.
Ensuring that all parties involved have equal bargaining power and can fully understand the terms and conditions of the agreement is crucial to avoiding an unconscionable contract. If one party is at a disadvantage, they may not fully understand the terms of the agreement or feel that they have the power to negotiate for fairer terms. Putting all contracts in writing and clearly spelling out the terms and conditions of the agreement will safeguard against an unconscionable contract. Courts are also more likely to enforce contracts that are in writing and signed by both parties, as they provide a more precise record of the terms of the agreement.
