Different Types of Contracts Under the Indian Contract Act, 1872

Explore different types of contracts based on formation, consideration, execution, and validity.
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4 min
22 December 2025

The Indian Contract Act classifies contracts based on several criteria, each of which is crucial for understanding the legal framework of agreements. A contract is a written or spoken agreement that is enforceable by law and commonly applies to employment, sales, or tenancy. Unilateral contracts, where one party makes a promise that anyone willing to fulfil the stated conditions can accept, serve as an example of how diverse contracts can be. This article will explain the different types of contracts under the Indian Contract Act and provide an overview for businesses looking to navigate the details of legal agreements.

Types of contracts on the basis of classification

Contracts are classified based on the following criteria:

  • Formation: How the contract is created, whether explicitly agreed upon or inferred from actions
  • Nature of consideration: The promises exchanged between the parties
  • Execution: The stage of performance of the contractual obligations
  • Validity: The enforceability of the contract under the law

Each classification serves a distinct purpose and provides clarity on the rights and responsibilities of the involved parties. This article will explain these categories, offering examples for better understanding.

A contract is a legal agreement between two or more parties that creates obligations which the law can enforce. Governed mainly by the Indian Contract Act, 1872, contracts are the foundation of all business dealings, including employment, sales, partnerships, and loans. Knowing the different types of contracts is not just theoretical—it is an important business skill that helps create secure agreements, reduce legal risks, and keep operations running smoothly.

This guide explains the main types of contracts under Indian law, with practical examples to help entrepreneurs and business owners understand and manage their legal responsibilities confidently.

Types of contracts classified

Contracts in India are classified using four main criteria. Each helps to understand the agreement’s nature, how it can be enforced, and how it is carried out.

Basis of Classification

Question It Answers

Main Types

Formation

How is the agreement made?

Express, Implied, Quasi-Contract

Consideration

What promise or exchange is involved?

Bilateral, Unilateral

Execution

How much of the contract has been performed?

Executed, Executory

Validity

Is the contract legally enforceable?

Valid, Void, Voidable, Illegal, Unenforceable
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Types of contract on the basis of formation

This explains how a contract is formed:

a) Express Contract

  • Definition: The terms are clearly stated, either in writing or verbally.
  • Key Feature: Clear offer and acceptance with no ambiguity.
  • Business Example: A signed agreement with a vendor detailing payment, work scope, and deliverables.

b) Implied Contract

  • Definition: Terms are understood from the actions, conduct, or circumstances of the parties.
  • Key Feature: No written or spoken words; the law assumes an agreement based on behaviour.
  • Business Example: Ordering and eating food at a restaurant implies a contract to pay. Similarly, a business regularly receiving and paying for supplies implies a continuing supply contract.

c) Quasi-Contract

  • Definition: Not an actual contract, but a legal obligation created to prevent someone from unfairly benefiting.
  • Key Feature: Imposed by the court where no formal agreement exists, to ensure fairness.
  • Business Example: If 'A' accidentally sends 100 units of raw material to 'B', and 'B' uses it, the court may require 'B' to pay 'A' to avoid unjust enrichment.

Types of contract on the basis of consideration

This looks at the type of promise exchanged:

a) Bilateral Contract

  • Definition: Both parties make promises to each other. Each is both a promisor (to perform) and a promisee (to receive performance).
  • Key Feature: Both sides have obligations from the moment the agreement is made.
  • Business Example: A business loan agreement. The lender promises to provide funds, and the borrower promises to repay with interest. Both are legally bound from the start.

b) Unilateral Contract

  • Definition: One party promises something in return for an act by another. The contract only exists when the act is completed.
  • Key Feature: An open offer; only the person performing the act is legally bound.
  • Business Example: A company offers a public reward for finding a lost document. The contract becomes enforceable only when someone finds and returns it.

Types of contract on the basis of execution

This shows how much of the contract has been fulfilled:

a) Executed Contract

  • Definition: Both parties have fully completed their obligations.
  • Key Feature: The transaction is finished; nothing more is left to do.
  • Business Example: A cash-and-carry purchase where payment and delivery happen at the same time.

b) Executory Contract

  • Definition: One or both parties still need to perform their obligations, either fully or partially.
  • Key Feature: Performance is due in the future. Most business agreements start as executory contracts.
  • Business Example: An annual IT services contract where the client pays monthly and the provider maintains systems throughout the year.

Types of contract on the basis of validity

This is the most important classification as it decides the legal enforceability of a contract.

Type

Legal Status

Key Reason

Business Example & Implication

Valid Contract

Fully enforceable

Meets all essential requirements: offer and acceptance, lawful consideration, capacity, free consent, lawful object, and not declared void.

A properly drafted franchise agreement. Both parties can legally enforce the terms.

Void Contract

Not enforceable from the start

Missing a core element or involves an unlawful purpose.

An agreement to smuggle goods. It is null and void from the beginning.

Voidable Contract

Enforceable at the choice of the affected party

Affected by coercion, undue influence, fraud, or misrepresentation.

A supply contract signed under pressure. The owner can choose to cancel it or continue.

Illegal Contract

Not enforceable; parties may be penalized

The purpose or consideration is forbidden by law.

An agreement to fix prices (cartel). It is illegal and may attract fines.

Unenforceable Contract

Valid but cannot be enforced in court due to a technical issue

Lacks legal formalities (e.g., not stamped, barred by limitation).

An oral agreement to sell land (requires written registration). Courts will not enforce it.

 

Types of contracts commonly used in business

Listed below are the types of contracts commonly used in business:

  • General business contracts: These cover a range of agreements including partnership agreements, indemnity clauses, non-disclosure agreements (NDAs), and property or equipment leases. While their formats vary, each outlines key terms and responsibilities critical to business relationships.
  • Bill of sale: A bill of sale legally transfers ownership of property from one party to another, usually in exchange for money. Commonly used in transactions like equipment sales or vehicle transfers, it's one of the simplest contracts to execute.
  • Employment contracts: Used when hiring staff, these agreements define the employee’s role, compensation, responsibilities, and other terms. They help protect both employer and employee by clearly outlining expectations.
  • Licensing agreements: These contracts grant one party the right to use a product, service, or intellectual property in exchange for royalties. All terms, including usage rights and payment structure, are spelled out in detail.
  • Promissory notes: A promissory note is a written promise by one party to repay a specified amount to another. While repayment is typically due on demand, the lender must provide notice as per the contract terms.

Strategic Importance of Contract for Businesses

Understanding different types of contracts is an essential business skill because it:

  • Reduces Legal Risk: Helps spot unenforceable or voidable clauses before signing.
  • Ensures Strategic Fit: Lets you pick the right contract type (e.g., bilateral service contract vs. unilateral reward) for your business goal.
  • Protects Financial Interests: Clearly defines payment terms, performance milestones, and consequences of breach.
  • Supports Funding: A clear, valid contract (like a future sales agreement) strengthens your case when applying for a business loan by showing predictable cash flow and formal operations.

When entering large executory contracts, such as big purchase orders, you may need extra working capital to meet your obligations. A Bajaj Finserv Business Loan can provide the funds needed to fulfil contracts, maintain credibility, and take advantage of growth opportunities without cash flow stress.

Conclusion

In business, a contract is not just a piece of paper—it is a tool to manage risk and enable growth. Understanding contract law helps you create fair and strong agreements, and enter partnerships with confidence. It turns legal compliance from a reactive task into a strategic advantage.

Before signing any agreement, make sure you fully understand it. And when fulfilling a contract opens up a growth opportunity that needs capital, arrange financing that supports your business needs.

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Frequently asked questions

What are the four types of contracts?

The four common types of contracts are express, implied, unilateral, and bilateral. Express and implied contracts are based on how they are formed, while unilateral and bilateral contracts are classified by the nature of consideration exchanged between the parties.

What are the 5 classification of contracts?

Contracts are classified based on formation, consideration, execution, validity, and commonly used business applications. These categories help define how contracts are created, performed, and enforced, making it easier to understand legal obligations in various scenarios.

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