Types of Contract Based on Formation

What is Contract?

Contract is defined as a legally binding agreement between two or more parties that outlines the terms and conditions governing their mutual rights and obligations. Contracts can be verbal or written, but written contracts are typically preferred as they provide a clearer record of the agreement and are easier to enforce in a court of law. A valid contract typically consists of four essential elements: an offer, acceptance, consideration, and an intention to create legal relations. An offer is a proposal to agree, acceptance is the agreement to the terms of the offer, consideration is something of value exchanged between the parties, and the intention to create legal relations means that the parties must intend for the contract to be legally enforceable.

Contract Based on Formation

Contracts based on formation refer to the various ways in which contracts can come into existence. It pertains to the methods and circumstances under which contractual agreements are established and the nature of those agreements. The different types of contracts based on formation encompass the specific conditions, actions, or elements that must be present for a contract to be legally binding. Understanding these categories is essential in contract law to determine the enforceability and obligations of the parties involved.

I. Express Contract

Express contract is a legally binding agreement in which the terms and conditions of the contract are explicitly stated, either in written or verbal form. In an express contract, the parties involved clearly outline and mutually agree upon the specific terms, obligations, rights, and responsibilities that govern the agreement. This type of contract is characterised by its transparency and clarity, as both parties have a full understanding of the agreed-upon terms, leaving little room for misinterpretation or ambiguity.

Key takeaways from Express Contract:

• Express contracts are prevalent in various aspects of daily life, including business, real estate, and consumer transactions.
• They serve as a foundation for ensuring that parties’ expectations are met, and any potential disputes can be resolved with reference to the documented terms of the contract.

Example: When someone decides to buy or sell a piece of real estate, they often enter into an express contract known as a Real Estate Purchase Agreement. In this document, the buyer and the seller explicitly outline the terms and conditions of the sale, including the purchase price, the property’s legal description, the closing date, and any contingencies such as inspections. Both parties sign this contract to indicate their understanding and acceptance of the stated terms, making it an express contract.

II. Implied Contract

Implicit contract, also known as an implied contract, is a legally binding agreement that is not explicitly documented in writing or verbally expressed but is inferred from the actions, conduct, or circumstances of the parties involved. In an implicit contract, the agreement is created when it is evident that both parties intend to be bound by certain terms and conditions, even though they have not been explicitly stated. This type of contract is often based on the principle of fairness and common expectations. Implied contracts are legally enforceable and rely on the principle of fairness and justice to uphold the parties’ intentions based on their actions and circumstances.

Example: Consider a situation in which a homeowner hires a plumber to fix a leaking pipe. The plumber arrives, inspects the issue, and proceeds to make the necessary repairs. In this case, there was no written or verbal agreement specifying the price or terms of payment. However, by virtue of the plumber’s actions and the homeowner’s acceptance of the services, an implied contract is formed, entitling the plumber to reasonable compensation for the work performed.

III. Quasi-Contract

Quasi-contract, often referred to as a “contract by estoppel,” is a legal concept that allows a court to impose an obligation or duty on a party, even in the absence of a formal written or verbal contract, in order to prevent unjust enrichment. This typically occurs when one party receives a benefit at the expense of another, and it would be inequitable or unfair to allow the recipient to keep the benefit without compensating the provider.

Key takeaways from Quasi Contract:

• Quasi-contracts are not true contracts in the traditional sense; they are created by a legal fiction to ensure fairness.
• The legal principle underlying quasi-contracts is that no one should be allowed to profit unjustly at the expense of another.
• Courts use quasi-contracts to remedy situations where it’s clear that one party has received something of value and, under principles of fairness and justice, should be required to provide compensation or restitution.

Example: Suppose Sarah, a homeowner, hires a contractor, Mike, to paint her house. They agree on a price of  ₹2,000 for the painting job. However, due to an administrative error on Sarah’s part, she accidentally pays Mike ₹2,000twice, resulting in an overpayment of ₹2,000. In this case, the overpayment creates a situation where Mike has received an undue benefit of an additional ₹2,000 without any valid reason. To prevent unjust enrichment, the principles of a quasi-contract come into play. Sarah can take legal action and ask the court to impose a quasi-contractual obligation on Mike to return the excess ₹2,000. This is done to rectify the unintended financial advantage that Mike received, ensuring that Sarah is not unfairly disadvantaged due to the mistake.