The 5 Different Types of Contracts

Contracts are critical legal agreements that we all rely on in multiple situations. They establish binding relationships between parties, creating a framework for mutual expectations and protecting interests.

While written contracts are commonly used for clarity and certainty, legally binding contracts can also be formed through oral communication or conduct, provided the essential elements of a contract are present. These elements include an offer, acceptance, consideration, and the intention to create legal relations.. 

Various types of contracts exist under English and Welsh law which address different needs. Understanding them are crucial when assessing the parties rights, obligations, and available remedies in a dispute and/or litigation.

This article explores five common types of contracts and their application in specific business contexts. For more information, contact Helix Law. As specialist litigation solicitors we litigate contracts in lots of different industries, factual and legal settings, ranging from commercial contracts between companies, between shareholders, and those between construction companies.

General Contract Types

Generally, a legally binding agreement will fall under one of the following types of contracts:

1. Fixed-Price Contracts

Fixed-price (or lump-sum) contracts set a predetermined price for specified work, commonly used in the supply of goods and services such as construction and manufacturing.

As the price is pre-agreed, parties benefit from predictability. For the paying party, the fixed sum allows for effective budgeting. However, if the time or materials needed to perform the vendor’s obligations extend beyond its original scope, they risk having to absorb those costs.

2. Time and Materials Contracts

In situations where the anticipated work and costs of a project cannot be pre-determined, parties often use time and materials (T&M) contracts. The price charged depends on the amount of time and materials used and isn’t fixed from the outset. 

These agreements offer flexibility, allowing parties to form legal relationships without necessarily knowing the extent of the work required. Parties can also agree on a capped figure to prevent costs from becoming excessive or unaffordable. Communication is key in this arrangement, and there may be clauses obligating contractors to provide their clients with regular updates throughout.

3. Implied Terms and Oral Contracts

Not all terms have to be written or expressly stated. Parties can bind themselves to an agreement verbally and through conduct. These arrangements arise daily and don’t require a formal written document to be valid. 

A typical example is ordering food at a restaurant. The customer doesn’t sign a formal agreement, they expressly agree their order and it’s expressly agreed or is implied that they will pay for what they’ve eaten. Similarly, if you get into a taxi, it’s expected you’ll pay for the journey when you get out, but there’s no written agreement. 

Implied terms protect individuals and businesses where formal documents may be impractical or disproportionate. However, they can create ambiguity, making it harder to resolve disputes without a clear record. Therefore, the background circumstances are key in assessing the parties rights and obligations.

4. Unilateral Contracts

A unilateral contract is formed when one party (the offeror) makes a promise to do something (e.g., pay a reward) if the other party (the offeree) performs a specified act. The offeree is not required to make a counter-promise, and the contract becomes binding only upon the full performance of the stipulated act.. 

This type of contract often arises when rewards are offered to the public, for example for finding a lost pet or winning a competition. As the initial offer is usually available to multiple people, the offeror should draft it clearly to avoid confusion. 

5. Bilateral Contracts

Bilateral contracts arise when parties make mutual promises to each other. It’s the most common type of arrangement, with each person offering something of value. The parties become legally bound by the terms of the arrangement as soon as soon as the promises are exchanged, whether orally or in writing. 

These are used in employment situations, where employees agree to perform specific duties in exchange for a wage or salary. Another example is purchasing goods online, where consumers pay sellers to deliver their ordered items.

Bilateral agreements tend to be easier to enforce, as they’re usually more detailed and recorded in writing. 

CommercialContract Types

Some contracts exist purely for business purposes and are designed to protect commercial relationships. They usually fall within one of the general types of agreement above, but have additional terms tailored to particular situations. They include:

1. Employment

Employment contracts govern the relationship between an employee and an employer. They outline what’s expected of staff members, including working hours and responsibilities. In return, the employer pays them a fixed rate or salary, plus any benefits. 

Parties can agree to fixed-term, full-time, part-time, or zero-hours contracts, provided this is clearly stated. These agreements ensure employees perform their roles appropriately while protecting them from unfair or discriminatory treatment. 

2. Non-Disclosure Agreements (NDAs)

NDAs are common in business transactions where companies must protect confidential and sensitive information. They’re often incorporated into broader agreements such as employment and commercial contracts. 

Parties can have unilateral NDAs where one party agrees not to disclose information, or bilateral NDAs, where both parties promise not to share each other’s confidential details. The agreement must specify what information is covered and for how long. Notwithstanding this, for the contract to be enforceable, the restrictions imposed on either party should not be unreasonably onerous, though this will depend on the specific circumstances.

3. Shareholder and Partnership Agreements

Shareholder and Partnership agreements are valuable contracts for two or more individuals in business together. While not legally required, these agreements allow shareholders and partners to define each person’s role within the business, their respective shares and/or capital contributions, liabilities, and exit options. 

By tailoring the agreement to their specific needs, shareholders and partners can establish a clear framework, reducing the risk of disputes. 

In the absence of a written shareholders agreement the Companies Act 2006 and the Articles of Association imply various technical and legal frameworks to the relationships between shareholders, and between shareholders and the company. In the absence of a partnership agreement, the default provisions of the Partnership Act 1890 will govern the rights and obligations of the partners. These default rules are subject to amendment, but may include equal sharing of profits and losses, joint management rights, and the requirement for unanimous consent to admit new partners or change the nature of the business. However, these provisions may not align with the partners’ intentions, making a bespoke agreement preferable to avoid misunderstandings or disputes. We frequently litigate shareholder and partnership disputes. 

4. Service-Level Agreements (SLAs)

SLAs accompany broader business agreements and are used to determine the expected service from a provider. It identifies specific metrics that the vendor should work towards and the remedies for failing to meet such standards. They prevent businesses from making empty promises to secure deals without any consequences. 

Frequently Asked Questions

What Is the Definition of a Contract?

A contract is a legally binding agreement between two or more parties. It’s created when there’s an offer, acceptance, consideration (something of value), and intention to create legal relations. It can be made verbally, in writing, or even implied in certain circumstances.

Final Thoughts

Contracts play a vital role in regulating personal and professional legal relationships. Breaching a contract can lead to a claim for damages and/or other remedies against the party responsible. Whether it’s a fixed-price arrangement or an implied agreement, each type serves a distinct purpose under English and Welsh law. Understanding the different types helps ensure agreements are fit for purpose, legally enforceable, and aligned with the parties’ intentions.

Business-specific contracts, such as employment agreements, NDAs, partnership contracts, and SLAs, are tailored to protect commercial interests and clarify roles and responsibilities. Choosing the proper document can prevent disputes, safeguard sensitive information, and support businesses’ long-term success.

If you are involved in a contract dispute and require assistance in understanding your rights and obligations and/or your best next steps to achieve your commercial aims, contact us at Helix Law today. Our experienced solicitors offer specialised advice so you can be confident in making informed decisions and be clear on the options available to you to ensure that your interests are protected and any claim is maximised.