Introduction: Why Do Contracts Have Different Classifications?
Contracts are classified in different ways to understand how they are formed, how obligations arise, and how they are enforced under the law. As contracts can vary in their structure, purpose, and legal hold, these classifications help organize legal principles and make it easier to determine the rights and responsibilities of the parties involved.
What Are the Major Classifications of Contracts?
Contract law classifies contracts in several ways, depending on the aspect of the agreement being considered. These classifications help in understanding how contracts are formed, enforced, and performed. The major classifications are based on:
- Nature of obligation
- Formation
- Legal validity
- Performance
- Form
In addition, there are certain contracts that are considered special types due to their unique characteristics and legal implications.
Types of Contracts by Nature of Obligation: Bilateral vs. Unilateral Contracts
Contracts are divided into two categories based on the nature of obligation: bilateral and unilateral.
What Are Bilateral Contracts?
Bilateral contracts are contracts where both parties make promises to each other to do something in the future. In this contract type, both parties are legally obligated to fulfill their promises.
For example, if you hire a contractor to renovate your kitchen, you agree to pay a specified amount upon completion of the project, while the contractor agrees to carry out the renovation according to your specifications.
What Are Unilateral Contracts?
On the other hand, unilateral contracts are agreements where one party makes a promise or offer that the other party can accept by performing an action or completing a certain task.
Under this contract type, only the party making the offer is legally obligated to fulfill the promise, while the other party can choose to accept or decline the offer by performing the specified action.
For example, a reward offer for lost property is a unilateral contract. If someone offers a reward for finding and returning a lost pet, they are only required to pay once the task is successfully performed. Until then, the person who may choose to act is not legally bound to do so.
What’s the Difference Between Bilateral and Unilateral Contracts?
The key distinction between the two lies in how many parties are legally bound to perform. In a bilateral contract, both parties are expected to fulfill their respective commitments. On the other hand, only one party makes a binding promise in a unilateral contract.
Which is Better: Bilateral or Unilateral Contracts?
Each type has advantages and limitations. The choice between bilateral and unilateral contracts depends on the goals of the parties and the context of the agreement.
Bilateral contracts are best suited when both parties want to make mutual commitments, which:
- Creates predictability
- Reduces misunderstandings
- Builds trust between parties
However, bilateral contracts can be more complex, and poorly drafted terms may lead to disputes. Legal guidance is often recommended to ensure fairness and enforceability.
In contrast, unilateral contracts are useful when one party wants to encourage a specific action or behavior without immediately binding the other party to a promise. They provide flexibility for the party making the offer, but they carry the risk that the other party may never perform the required act.
A common business example for unilateral contracts is a sales incentive program. A company might offer a bonus to the first salesperson who closes a deal over a certain amount and the company is only obligated to pay if the salesperson achieves the target.
Ultimately, neither type is inherently better. The right choice depends on whether mutual obligations are needed or if a single-party incentive suffices.
Types of Contracts by Formation: Express, Implied, and Quasi-Contracts
Contracts can also be classified based on how they are created or formed.
What Are Express Contracts?
Express contracts are contracts that are agreed upon verbally or in writing where all the terms are clearly expressed.
What Are Implied Contracts?
Implied contracts are legally binding agreements that arise from the actions, conduct, or circumstances of the parties involved, rather than from an explicit agreement or written contracts.
What Are Quasi Contracts?
Quasi contracts are obligations that are imposed by law, where the terms are not expressly stated but are recognized by the court to prevent one party from being unfairly benefited at the expense of another. It does not have to be agreed upon verbally or in writing.
Key Differences: Express, Implied, and Quasi-Contracts
Express contracts are typically formed when the parties involved want to ensure that the terms and conditions of the agreement are clearly understood and agreed upon. They are prevalent in business transactions — like employment agreements, service agreements, lease agreements, and sales contracts — where services, goods, and obligations are being exchanged among parties, particularly in transactions that extend over a long period.
Meanwhile, implied contracts usually form when:
- The parties involved have a pre-existing relationship and trust each other to uphold their obligations, such as a long-standing business relationship.
- Negotiating and drafting a formal written contract is impractical or difficult, such as when a company avails one-time printing services for an event. The printing company completes the order and delivers the materials, and the company pays for the service, even though no formal contract was created beforehand
On the other hand, quasi contracts are imposed by courts and not necessarily any agreement between the parties.
For example, if a company mistakenly pays a vendor $500,000 instead of $50,000, the supplier may be required to return the excess payment. Even without a written agreement covering the mistake, failing to return the $450,000 would result in the supplier being “unjustly enriched,” and the court can impose a quasi contract to ensure fairness.
Types of Contracts by Legal Validity: Valid, Void, Voidable, and Unenforceable Contracts
Following our contract basics guide, contracts are agreements that must include certain key elements — intention, offer, acceptance, consideration, capacity, and lawful purpose — to be considered legally valid. Missing even just one element may make an agreement not qualify as a contract.
Even so, contract law often classifies agreements that are missing one or more of these elements in “contracts” for analytical purposes. These categories are: valid, void, voidable, and enforceable contracts.
What Are Valid Contracts?
A valid contract is an agreement that satisfies all the essential elements required to make it legally binding. This typically includes intention, offer, acceptance, consideration, capacity, and a lawful purpose. When these elements are present, the contract may be enforceable by law.
However, what constitutes a valid contract may vary depending on the jurisdiction. Different countries may have specific legal requirements or interpretations of these elements. For example, the rules governing legally binding contracts in the Philippines may differ from those in Singapore, Malaysia, Thailand, or Indonesia.
What Are Void Contracts?
A void contract is an agreement that lacks one or more of the essential elements required for a valid contract, making it legally invalid from the outset. As a result, it cannot be enforced by law and both parties are not obligated to perform any of the terms.
What Are Voidable Contracts?
A voidable contract is a legally valid agreement that remains enforceable unless and until the aggrieved party chooses to cancel it, typically because their consent was not freely or properly given due to factors such as misrepresentation, fraud, or lack of capacity.
What Are Unenforceable Contracts?
An unenforceable contract is an agreement that is valid in principle but cannot be enforced in a court of law due to certain legal defects. Although it may contain all the essential elements of a valid contract, it has no legal effect unless and until the issue affecting its enforceability is resolved.
What Is the Difference Between Void and Voidable Contracts?
A void contract is an agreement that is not valid from the start for a number of reasons. For instance, non-compete clauses in the Philippines must have reasonable limitations with respect to time, trade, and place. Otherwise, they may be considered invalid, as highlighted in the Ferrazzini v. Gsell case (see full case discussion here).
On the other hand, voidable contracts typically arise from issues affecting consent. While the agreement is initially valid and enforceable, it may be cancelled at the option of the aggrieved party if their consent was not freely or properly given.
What Is the Difference Between Valid and Unenforceable Contracts?
Valid contracts are agreements that meet all the legal requirements of the jurisdiction and can be enforced in court.
In contrast, an enforceable contract may appear valid as it contains the essential elements of a valid agreement, but cannot be upheld in court for several reasons, such as:
- Failure to comply with required formalities (e.g., not being in writing when required)
- Non-compliance with specific legal requirements in a given jurisdiction
- Expiration of the statute of limitations to file a claim
- Insufficient evidence to prove that the agreement exists
For example, a landlord may wish to sue a corporate tenant for unpaid rent but waits too long to file the claim. Even if the lease itself is valid, the claim may be unenforceable because the legal time limit (statute of limitations) has expired.
Types of Contracts by Performance: Executed vs. Executory Contracts
Contracts can also be classified based on how and when the parties’ obligations are performed, leading to two main types: executed and executory contracts.
What Are Executed Contracts?
An executed contract is a contract where the obligations of the parties have been fulfilled or are immediately accomplished at the time of the agreement.
What Are Executory Contracts?
An executory contract is a contract where some or all obligations still have to be performed in the future. Executory contracts usually involve ongoing duties, timelines, or scheduled performance that extend beyond the time the contract has been signed.
Executed vs. Executory Contracts: What’s the Difference?
Executed contracts are formed when all obligations are fully performed at the time of the agreement. For example, Company A hires a designer to create a logo. Once the logo is delivered and Company A makes the payment, all obligations are completed on both sides.
On the other hand, executory contracts involve obligations that are still to be performed in the future. For example, a company subscribes to Lexagle, a contract lifecycle management platform, for a one-year plan. Even if the company pays the full annual fee upfront, Lexagle delivers ongoing services, support, and updates throughout the year. Since the obligations are performed over time, this subscription is an executory contract.
Types of Contracts by Form: Oral, Physical, and Electronic
Contracts don’t always look the same. They can be spoken, written on paper, or signed digitally.
Oral Contracts
Oral contracts refer to verbal agreements that contain all the necessary elements of a valid contract.
Physical Contracts
Physical contracts, also called traditional or paper contracts, are legally binding agreements documented on paper. They often include handwritten signatures or printed with e-signatures.
Electronic Contracts
Electronic or digital contracts are legally enforceable agreements created and signed in electronic format.
Are Oral, Physical, and Electronic Contracts Legally Binding?
- Physical Contracts: Physical contracts are always legally binding, especially for agreements that require a tangible record under the law. For example, lease agreements, property transfer, and certain high-value business contracts typically must be in physical form to be enforceable.
- Electronic Contracts: Electronic are legally enforceable in most jurisdictions, as long as they meet the requirements for electronic signature and data retention policies. However, some contracts need a physical form to be legally binding, like certain real estate contracts and those requiring notarization. Additionally, there are some additional requirements in certain jurisdictions. For example, under the U.S. ESIGN Act, digital signatures must include features like timestamping, identity verification, audit trails, and secure electronic storage to ensure the contract is legally enforceable.
- Oral Contracts: Contrary to popular belief, oral contracts are legally binding as long as they meet all the essential elements of a valid contract. However, they are less commonly used because proving the terms can be difficult, especially in the event of a dispute. Documentation such as emails, messages, or witness testimony is usually needed to support the agreement.
Special Contract Types: Unconscionable, Adhesion, and Aleatory Contracts
Apart from the main classifications, some contracts are considered special because they raise unique legal issues or involve unusual terms. These include unconscionable, adhesion, and aleatory contracts.
What Are Unconscionable Contracts?
An unconscionable contract is a type of contract that is so one-sided and unfair that it is considered to be unconscionable or against public policy. These contracts are often involved in situations where one party has significantly more bargaining power than the other and is able to take advantage of the other party's lack of bargaining power.
What Are Contracts of Adhesion?
A contract of adhesion is a type of contract where one party has significantly more bargaining power than the other, and as a result, the one party is unable to negotiate the terms of the contract. The terms of the contract are usually presented as a "take it or leave it" proposition, leaving the other party with little to no bargaining power.
What Are Aleatory Contracts?
An aleatory contract is a type of contract where the parties involved are uncertain about the outcome or performance of the contract. The performance of one party's obligation is contingent on the occurrence of an uncertain event, such as an earthquake, fire, or flood.
In an aleatory contract, the parties are essentially gambling on the occurrence of a particular event. For example, an insurance contract is an aleatory contract because the payment of premiums by the policyholder is contingent on the occurrence of an uncertain event, such as an accident, fire, or theft.
Unconscionable vs. Adhesion Contracts: What’s the Difference?
The key difference between the two is that a contract of adhesion refers to an agreement formed under unequal bargaining power. One party drafts the terms and the other can only accept or reject them. While these contracts are generally enforceable, they may be scrutinized by courts for fairness. In contrast, an unconscionable contract goes a step further — its terms are so one-sided or oppressive that a court may refuse to enforce it altogether.
Why Businesses Need to Understand Contract Classifications
Each contract classification has different legal implications, risks, and requirements. Understanding these helps businesses operate more smoothly and avoid costly mistakes.
- Contract classifications help businesses determine their rights and obligations. For example, knowing whether a contract is express, implied, or quasi affects how obligations arise and how they can be enforced.
- Contract classifications help businesses manage legal risks more effectively. Certain contracts like void or unenforceable contracts may not provide legal protection, and others — such as unconscionable or adhesion contracts — may be challenged in court.
- Contract classifications guide businesses in choosing the appropriate form of agreement. For example, express contracts may be required for long-term or high-value transactions, while implied contracts in routine or fast-paced business relationships.
- Contract classifications help businesses improve contract management. Businesses often handle multiple agreements at different stages. Some of them are fully performed and others are ongoing. Thus, recognizing whether a contract is executed or executory helps ensure obligations are tracked and fulfilled properly.
Avoid Risky Contract Types with Lexagle
Certain contract types — like unconscionable, adhesion, or void contracts — can expose a business to legal and financial risks if not carefully reviewed. These agreements often contain unfair terms, imbalanced obligations, or may not be legally enforceable, potentially causing significant problems for your organization.
With Lexagle, companies can take a proactive approach to managing contract risk. Features like contract redlining ensure compliance with internal playbooks and cross-border regulations, helping prevent the drafting or acceptance of void, unenforceable, unconscionable, or adhesion agreements.
In addition, obligations tracking helps businesses stay on top of ongoing duties in executory contracts, reducing the risk of missed or delayed performance.
Ready to experience the Lexagle difference? Book a demo to get a personalized walkthrough and see how Lexagle can help you avoid risky contract types.
Frequently Asked Questions
Are bilateral contracts better than unilateral contracts?
No. what is “better” depends on the situation. Bilateral contracts are ideal for most business arrangements that involve ongoing obligations from both parties. Unilateral contracts are useful for incentives, rewards, or situations where only one party is expected to act.
Are implied contracts and quasi contracts the same?
No. Implied contracts form from the actions or behavior of the parties, showing their intent to agree even without words or writing. Quasi contracts are created by courts to prevent unjust enrichment, regardless of whether the parties intended to make a contract.
Are implied contracts used in business?
Yes. Implied contracts are generally used when the parties involved have a pre-existing relationship — such as a long-standing business relationship — and trust each other to uphold their obligations.
Why are there voidable contracts?
Voidable contracts exist primarily to protect parties who may have been misled, coerced, or lacked full capacity when entering into an agreement. They allow the affected party the option to either enforce or cancel the contract, ensuring fairness while still giving the other party a chance to perform if the issues are resolved.
Can unenforceable agreements become valid contracts?
Yes. When the defects making the contract unenforceable are corrected, unenforceable contracts can become valid contracts.
Are aleatory contracts legally binding?
Yes, aleatory contracts are valid and enforceable. The uncertainty involved is a defining feature, not a defect, provided the agreement is lawful and entered into with proper consent.
Are unconscionable contracts legal?
No. Courts will usually void it or modify its terms to ensure fairness.
