What Are the Different Types of Contracts?

Contracts outline agreements, terms, and conditions between parties, ensuring mutual understanding and accountability. With different types of contracts, it can be overwhelming to know where to start.

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This guide will delve into the diverse world of contracts, exploring different types of contracts in business used in various contexts. From understanding the fundamentals of business contracts to exploring specific agreements like employment contracts, construction, and sales contracts, we'll cover it all. We'll also provide insights into essential business contract templates to help you get started.

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Why Are Contracts Important?

Contracts are more than just legal documents. A well-crafted business contract outlines the expectations, responsibilities, and obligations of each party, minimizing the potential for misunderstandings and disputes. It serves as a binding agreement that can be enforced legally, providing a sense of security and trust.

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Understanding the different types of contracts in business is important for effectively managing them, and mitigating risks. By familiarizing yourself with the various types of contracts and their specific provisions, you can select the most appropriate agreement for your needs and protect you or your business interests.

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In essence, contracts are essential tools for businesses of all sizes. They facilitate collaboration, protect investments, and ensure that everyone involved is on the same page.

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10 Most Common Contracts

1. Fixed-price contracts

A fixed-price contract, also known as a lump sum contract, is a common type of agreement where a specific price is agreed upon for the completion of a project or the delivery of a product. The contractor assumes the risk of cost overruns, while the client enjoys price certainty. This contract type is often used in construction, IT, and manufacturing industries.

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2. Cost-plus contracts

In a cost-plus contract, the customer reimburses the contractor for the actual costs incurred in completing the project, plus an agreed-upon fee or percentage. This type of contract is often used when the project scope is uncertain or subject to change, such as in research and development or engineering projects.

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3. Time & material contracts

Time and material contracts are commonly used when the project scope is not fully defined upfront. The contractor charges for labor based on an hourly rate and for materials at cost, plus a markup. This contract type offers flexibility but can lead to higher costs if not managed effectively.

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4. Unit price contracts

Unit price contracts are used in projects where the quantity of work is difficult to estimate in advance. The contract specifies a fixed price for each unit of work or material, and the total contract price is determined by the actual quantities used. This type of contract is common in construction, where the exact amount of materials needed may vary.

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5. Unilateral contracts

A unilateral contract is formed when one party makes a promise in exchange for the performance of an act by another party. The contract becomes binding only when the act is completed. Common examples include rewards, contests, and insurance policies.

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6. Bilateral contracts

A bilateral contract is created when two parties exchange mutual promises. Both parties have obligations to fulfill under the contract. Most business contracts are bilateral, such as sales contracts, employment contracts, and lease agreements.

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7. Adhesion contracts

An adhesion contract is a standardized contract prepared by one party and presented to the other on a "take-it-or-leave-it" basis. The weaker party has little or no bargaining power to negotiate the terms. These contracts are often used in consumer transactions, such as insurance policies and rental agreements.

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8. Aleatory contracts

An aleatory contract is a contract where the performance of one or both parties is contingent upon the occurrence of a specific uncertain event. Insurance contracts are the most common example of aleatory contracts.

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9. Express contracts

An express contract is created through explicit written or oral agreement between the parties. The terms and conditions of the contract are clearly stated and understood by both parties.

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10. Simple contracts

A simple contract is a legally binding agreement that doesn't require any specific formalities. It can be oral or written, and it's typically used for everyday transactions. However, it's important to note that while simple contracts are enforceable, having a written contract can provide stronger evidence in case of disputes.

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Top 10 Contracts Commonly Used by Businesses

Businesses rely on a variety of contracts to protect their interests and facilitate operations. Let's explore some of the most common contract types used in the business world.

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1. Service contracts

A service agreement is a contract between a service provider and a client outlining the services to be provided, the cost, payment terms, project timeline, and other important details like confidentiality and dispute resolution. It protects both parties and ensures clear expectations. To assist in drafting a service agreement, Sign.Plus can provide a service contract as a starting point.

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2. Sales agreement

A sales agreement, also known as a purchase agreement, is a contract between a buyer and seller for the sale of goods or services. It details the product or service being sold, the price, payment terms, delivery or performance dates, warranties, return policies, and dispute resolution procedures. Sales agreements can be used for both physical products and digital services. To streamline the creation of a sales agreement, Sign.Plus can provide a sales agreement template as a starting point. 

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3. Lease agreements

A lease agreement is a contract between a landlord and tenant outlining terms for property rental. It details rental price, payment schedule, lease duration, tenant rights and responsibilities, property conditions, and procedures for maintenance and termination. To streamline the creation of a lease agreement, Sign.Plus can provide a lease (rental) agreement template as a starting point. 

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4. Employment contract agreement

Although there are various types of employment contracts out there, a general employment contract typically outlines the terms and conditions of employment between an employer and employee. It typically includes details about job title, responsibilities, compensation (salary, bonuses, benefits), working hours, vacation time, sick leave, termination procedures, confidentiality obligations, intellectual property rights, and dispute resolution mechanisms. To make drafting an employment agreement easier, Sign.Plus has an employment agreement template available.

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5. Non-disclosure agreement

A non-disclosure agreement, or confidentiality agreement, is a legally binding contract that protects sensitive information shared between parties. It prevents the unauthorized disclosure of confidential information, trade secrets, proprietary data, or other classified material. NDAs can be unilateral (one party protects information shared with another) or mutual (both parties agree to protect shared information). To assist in drafting an NDA agreement, Sign.Plus can provide nda template as a starting point.

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6. Licensing agreement 

A licensing agreement is a legal contract that permits one party (the licensee) to use intellectual property owned by another party (the licensor). This intellectual property can include patents, trademarks, copyrights, or other creative works. The agreement typically outlines the specific rights granted, the duration of the license, and any associated fees or royalties. Sign.Plus offers a licensing agreement template to streamline the process of outlining one’s intellectual property rights.

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7. Partnership agreement

A partnership agreement is a legal contract between two or more individuals or entities who join forces to operate a business. It outlines the terms of the partnership, including the contributions of each partner, profit and loss sharing, decision-making processes, management structure, and dispute resolution procedures. Sign.Plus can help you draft a partnership agreement quickly with their ready-made partnership agreement template.

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8. Loan agreement

A loan agreement is a contract between a lender and a borrower that outlines the terms of a loan. This includes the amount borrowed, the interest rate, repayment schedule, any collateral required, and the consequences of default. Sign.Plus offers a loan agreement template to streamline the process of outlining confidentiality expectations.

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9. Franchise agreement

A franchise agreement is a legal contract between a franchisor and a franchisee that allows the franchisee to operate a business using the franchisor's brand, products, and business model. The agreement typically includes details about the franchise fee, royalty payments, territory rights, operational standards, and the duration of the franchise. To assist in drafting a franchise agreement, Sign.Plus can provide a franchise agreement template as a starting point.

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10. Indemnity agreements

An indemnity agreement is a contract where one party (the indemnitor) agrees to compensate another party (the indemnitee) for potential losses or damages arising from specific events or circumstances. To make drafting an employment agreement easier, Sign.Plus has an indemnity agreement template available.

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