Nature and Classes of Contract
by
Charles Lamson
A contract can be defined as a legally enforceable agreement between two or more competent persons. At first glance this seems like a very simple definition. Notice that this definition does not even require a written document. Later posts will be devoted exclusively to explaining and clarifying this definition.
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Making contracts is such an everyday occurrence that we often overlook their importance, except when the contracts are of a substantial nature. When one buys a cup of coffee during a coffee break, a contract has been made. When the purchaser agrees to pay $0.50 for the coffee, the seller agrees not only to supply one cup of coffee but also agrees by implication of law that it is safe to drink. If the coffee contains a harmful substance that makes the purchaser ill, a breach-of-contract has occurred that may call for the payment of damages. A breach of contract is the failure of one of the parties to perform the obligations assumed under the contract.
Business transactions result from agreements. Every time a person makes a purchase, buys a theater ticket, or boards a bus, an agreement is made. Each party to the agreement obtains certain rights and assumes certain duties and obligations. When such an agreement meets all the legal requirements of a contract, the law recognizes it as binding upon all parties. If one of the parties to the contract fails or refuses to perform, the law allows the other party an appropriate action for obtaining damages or enforcing performance by the party breaking the contract.
Contracts are extremely important in business because they form the very foundation upon which all modern business rests. Business consists almost entirely of the making and performing of contracts. A contract that is a sale of goods is governed by the Uniform Commercial Code (covered in a later post).
Requirements for a Contract
A valid contract is an agreement that courts will enforce against all parties. Such a contract must fulfill the following definite requirements:
You may test the validity of any contract using these five requirements.
Contracts Contrasted with Agreements
A contract must be in agreement, but an agreement need not be a contract. Whenever two or more persons minds meet upon any subject, no matter how trivial, an agreement results. Only when the parties intend to be legally obligated by the terms of the agreement will a contract come into existence. A later post explains how such agreements are formed. Ordinarily, the subject matter of the contract must involve a business transaction as distinguished from a purely social transaction.
If Mary and John promised to meet at a certain place at 6 p.m. and have dinner together, this is an agreement, not a contract, since neither intends to be legally bound to carry out the terms of the agreement.
If Alice says to David, "I will pay you $25 to be my escort for the Spring Ball," and David replies, "I accept your offer," the agreement results in a contract. David is legally obligated to provide escort service, and Alice is legally bound to pay him $25.
Classification of Contracts
Classification contracts are classified by many names or terms. Unless you understand these terms, you cannot understand the law of contracts. For example, the law maystate that executory contracts made on Sunday are void. You cannot understand this law unless you understand the words executory and void. Every contract may be placed in one of the following classifications:
Valid Contract, Void Agreements, and Voidable Contracts
Agreements classified according to their enforceability include valid contracts (defined above), void agreements, and voidable contracts. An agreement with no legal effect is void. An agreement not enforceable in a court of law does not come within the definition of a contract. A void agreement (sometimes referred to as a void contract) must be distinguished from an unenforceable contract. If the law requires a certain contract to be in a particular form, such as a deed to be in writing, and it is not in that form, it is merely unenforceable, not void. It can be made enforceable by changing the form to meet the requirements of the law. An agreement between two parties to perform an illegal act is void. Nothing the parties can do will make this agreement an enforceable contract.
A voidable contract would be an enforceable agreement but, because of circumstances or the capacity of a party, one or both of the parties may set it aside. The distinguishing factor of a voidable contract is the existence of a choice by one party to abide by or to reject the contract. A contract made by an adult with a person not of lawful age (legally known as a minor or infant) is often voidable by the minor. Such a contract is enforceable against the adult but not against the minor. If both parties to an agreement are minors, either one may avoid the agreement. Until the party having the choice to avoid the contract exercises the right to set the contract aside, the contract remains in full force and effect. An agreement that does not meet all five of the requirements for a valid contract might be void or it might be a voidable contract.
Express and Implied Contract
Contracts classified according to the manner of their formation fall into two groups: expressed and implied contracts. In an express contract, the parties express their Intentions by words, whether in writing or orally, at the time they make the agreement. Both their intention to contract and the terms of the agreement are expressly stated or written. Customary business terms, however, do not need to be stated in an express contract in order to be binding.
An implied contract (also called a contract implied in fact) is one in which the duties and the obligations that the parties assume are not expressed but are implied by their acts or conduct. The adage "actions speak louder than words" very appropriately describes this class of contracts. The facts of a situation imply that a contract exists. The parties indicate so clearly by their conduct that they have a mutual agreement and what they intend to do that there is no need to express the agreement in words to make it binding.
Formal and Simple Contracts
A formal contract must be in a special form or be created in a certain way. Formal contracts include contracts under seal, recognizances, and negotiable instruments.
When very few people could write, contracts were signed by means of an impression in wax attached to the paper. As time passed, a small wafer pasted on the contract replaced the use of wax. The wafer seal was in addition to the written signature. This practice is still used occasionally, but the more common practice is to sign a formal contract in one of these ways:
Jane Doe (Seal); Jane Doe [l. S.]
Today it is immaterial whether these substitutes for a seal are printed on the document, typewritten before signing, or the persons signing write them after their respective names. In jurisdictions where the use of the seal has not been abolished, the seal implies consideration.
In some states, the presence of a seal on a contract allows the party a longer time in which to bring suit if the contract is broken. Other states make no distinction between contract under seal and other written contracts. The Uniform Commercial Code abolishes the distinction with respect to contract for the sale of goods.
Recognizances, a second type of formal contract, are obligations entered into before a court whereby persons acknowledged they will do a specific specified act that is required by law. The persons acknowledge that they will be indebted for a specific amount if they do not perform as they agreed, such as the obligation undertaken by a criminal defendant to appear in court on a particular day. 
Negotiable instruments, discussed in later posts, are a third type of formal contract. They include checks, notes, drafts, and certificates of deposit.
All contracts other than formal contracts are informal and are called simple contracts. A few of these, such as an agreement to sell land or to be responsible for the debt of another, must be in writing in order to be enforceable; otherwise they need not be prepared in any particular form. Generally speaking, informal or simple contracts may be in writing, may be oral, or may be implied from the conduct of the parties.
A written contract is one in which the terms are set forth in writing rather than expressed orally. An oral contract is one in which the terms are stated in spoken, not written, words. Such a contract is usually enforceable; however, when a contract is oral, disputes may arise between the parties as to the terms of the agreement. No such disputes need arise about the terms of a written contract if the wording is clear, explicit, and complete. For this reason most business people avoid making oral contracts involving matters of very great importance. Some types of contracts are required to be in writing and are discussed in later posts.
Executory and Executed Contracts
Contracts are classified by the stage of performance as executory contract and executed contract. An executory contract is one in which the terms have not been fully carried out by all parties. If a person agrees to work for another for 1 year and return for a salary of $3,500 a month, the contract is executory from the time it is made until the 12 months expire. Even if the employer should prepay the salary, it would still be an executory contract because the other party has not yet worked the entire year, that is, executed that part of the contract.
An executed contract is one that has been fully performed by all parties to the contract. The Collegiate Shop sells and delivers address to Benson for $105, and Benson pays the purchase price at the time of the sale. This is an executed contract because nothing remains to be done on either side that is, each party has completed performance of each part of the contract.
Unilateral and Bilateral Contracts
When an act is done in consideration for a promise, the contract is a unilateral contract. If Smith offers to pay $100 to anyone who returns her missing dog and Fink Returns the dog, this would be a unilateral contract. It is unilateral (one-sided) in that only one promise is made. A promise is given in exchange for an act. Smith made the only promise, which was to pay anyone for the act of returning the dog. Fink was not obligated to find and return the dog, so only one duty existed.
A bilateral contract consists of a mutual exchange of promises to perform some future acts. One Promise is the consideration for the other promise. If Brown promises to sell a truck to Adams for $5,000, and Adams agreed to pay $5,000 to, then the parties have exchanged a promise for a promise---a bilateral contract. Most contracts are bilateral because the law states a bilateral contract can be formed when performance is started. This is true unless it is clear from the first a promise or the situation that performance must be completed. The test is whether there is only one right and duty or two.
Quasi Contract
One may have rights and obligations imposed by law when no real contract exists. This imposition of rights and obligations is called a quasi contract or implied in law contract. It is not a true contract because the parties have not made an agreement. Rights and obligations will be imposed only when a failure to do so would result in one person unfairly keeping money or otherwise benefiting at the expense of another. This is known as unjust enrichment. For example, suppose a tenant is obligated to pay rent of $300 a month but by mistake hands the landlord $400. The law requires the landlord to return the overpayment of $100. The law creates an agreement for repayment even though no actual agreement exists between the parties. For the landlord to keep the money would mean an unjust enrichment at the expense of the tenant. An unjust enrichment offends our ethical principles, so the law imposes our contractual obligation to right the situation.
 *SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 50-58*
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