20 Essential Types of Contracts Explained

If you’re running a business, you’re likely to hire a legal expert to draft, review, manage, and optimize any basic contract that you need. But this blog is for you if you want a primer on the most common contract types in business.

Explore various types of contracts from simple contracts to licensing agreements. Understand contract fundamentals and their significance across diverse situations.

Let’s get started.  

What are contracts?

A contract is a basic agreement between two or more parties with terms that create legal obligations and are enforceable. In case of a breach, the remedies and penalties are clearly defined so that parties can perform their obligations in the contract without excuse.

Why do different types of contracts exist for different use cases?

Contracts pervade business and personal relationships. You need contracts to:

These daily operations are governed by the rights and responsibilities assigned in different types of contracts. 

20 common types of contracts

As foundational documents for human and social cooperation, contracts play a crucial role in business transactions for clear, accountable, and legally protected business relationships. Next, let’s go over the 20 most common contracts in business.

General business contracts

This refers to a broad category of contracts used in business dealings and covers a range of business arrangements like employment, sales, services, and more.

For example, a business partnership agreement that outlines each partner’s contributions and profit-sharing terms.

Non-disclosure agreements

A contract that creates a confidential relationship between parties and prevents one or more parties from sharing sensitive assets, information, material, or information for a specific period. They are usually signed at the beginning of a business relationship or large financial exchange.

NDAs can be unilateral or bilateral depending on the types of business (M&A, joint ventures, teaming agreements), reciprocity, and number of parties involved.

When onboarding a new client, your organization is privy to the company’s sensitive information calling for an NDA.

Professional service agreements

Professional service agreements are contracts between a company or agency and a highly skilled professional vendor or partner, like a large consulting firm or an independent consulting subject matter expert. The contract defines expectations and compensation within the project schedule.

Among the most common industries and specialties that use professional service agreements are:

For example, you need a professional service agreement when you hire a market research firm before the development of a software product.

Bill of sale

Bills of sale are contracts that transfer the property ownership from seller to buyer. They can be of two types:

For instance, when you take a loan to buy a car, the conditional bill of sale gives the bank the right to repossess the vehicle if the buyer defaults on loan repayments.

For instance, when you buy a vehicle, the bill of sale confirms the full transfer of ownership when the buyer makes the payment.

Employment agreements

In employer agreements, an employer extends to an employee setting the terms and conditions of employment. It usually specifies the date of commencement, job title and description, duration of employment, compensation and benefits, rules and compliance policies, confidentiality clauses, non-compete clauses, dispute resolutions, termination, and so on.

Licensing agreement

A licensing agreement gives one party the right to use the property owner’s brand, patent, or trademark in return for royalty fees or revenue.

For instance, a toy manufacturer signed a licensing agreement with Disney for the legal authority to produce toys and merchandise based on the studio’s motion picture characters.

Promissory note

A promissory note is a written promise offered by one party to another. Typically issued by a financial institution or organization, the promissory notes allow any receiver to act as a lender.

Some examples are investment promissory notes or student loan promissory notes.

Fixed price contract

In a fixed price contract, a service provider agrees to offer services or complete a project for a final contract price which remains constant despite variables in time, resources, or costs.

For instance, a fixed price type contract for custom-built interiors allows for clearly defined expectations and cost estimates.

Cost-reimbursement contracts

A cost reimbursement contract is an agreement where two parties agree to cover the actual costs incurred by the seller or contractor during a project.

For instance, a construction project that specifies that the owner reimburses the contractor for costs incurred.

Cost-plus contract

A cost-plus contract is an agreement between a project owner and contractor where in addition to reimbursing these expenses, the contractor may receive an additional payment to cover profit, known as a cost plus incentive fee.

For instance, NASA contracts a firm to develop a spacecraft, covering all costs plus a 10% profit.

Time and material contract

A time and material contract typically outlines the labor in hours, materials, labor costs, and material costs incurred to complete a project. They are flexible, open-ended, and best suited for construction, consulting, and engineering projects.

For instance, a home renovation project would need an itemized time and materials contract with or without a fixed fee for the consultation.

Unit pricing contracts

Also known as a measurement contract, the pricing is based on unit cost rather than a lump sum. It is best suited for industries where quantity may vary and costs scale with volume increase.

For instance, a contractor may be paid per square foot of road pavement completed, given that the route is already established.

Unilateral contracts

This is a one-sided agreement created by an offeror on a take-it-or-leave-it basis. The other party accepts the offer by performing the act. It is often used in rewards, performance-based agreements, and loyalty programs.

For instance, an incentive contract in which a small business owner motivates an independent sales consultant with an incentive of $500 for a minimum 20% increase in month-on-month sales.

Bilateral contracts

A bilateral agreement is signed between two parties when each party makes a mutual promise and agrees to fulfill their side of the bargain. It is the most common form of contract where obligations exist on both sides.

For instance, sales contracts in which businesses agree to deliver products and customers agree to pay.

Implied contracts

An implied contract is a legally binding contract type that is derived from the actions, conduct, or circumstances of the parties involved. No words are explicitly mentioned or documented. It is implied-in-fact (by behavior) or implied-in-law (by legal obligation) and is harder to prove than a written agreement.

For example, you walk into a restaurant as a customer to order food, implying that you will pay after the meal.

Express contracts

In express agreements, parties explicitly state contract terms in written or spoken form. It specifies the rights, obligations, and expectations of parties. It leaves little room for misinterpretation and can be enforced in courts of law.

For example, when a company signs a contract with a supplier for monthly deliveries.

Simple contracts

Simple contracts require no formal legal process or notarization to certify the authenticity of a signature. They can be verbal or oral.

For example, a small business that agrees to buy office supplies from a vendor on WhatsApp.

Unconscionable contracts

An agreement that describes unjust terms, and favors the party with superior bargaining power, contrary to the good conscience of the courts. Such contracts are held unenforceable. They usually lack consideration or the lack of choice with maximum incentive for one party.

For instance, a lender extorts borrowers at a 200% interest rate.

Adhesion contracts

Contracts of adhesion are standard-form contracts drafted by the party with greater bargaining power. They are typically instituted in industries like insurance, telecommunications, software licensing, and SaaS sales agreements.

For example, an insurance contract with policies for medical expenses, deductibles, exceptions, and co-payments.

Aleatory contracts

An aleatory contract is an agreement that outlines terms that depend on events beyond the control of either party, such as death, accidents, or natural disasters. They are typically used in contracts related to speculative investments, life annuities, and gambling.

For example, annuity contracts promise to give investors a steady income helping retirees tackle the risk of outliving pension or savings.

These are the different contract types that allow businesses to establish a contractual relationship, set expectations, manage risk, and ensure legal compliance across various aspects of business.

Use a HyperStart AI-powered CLM to manage your contracts

To sum up, most contracts are legally binding documents that define obligations between parties. Businesses and individuals rely on them for various transactions. All of them contain key elements such as an offer, acceptance, awareness, consideration, contractual capacity, and legal purpose. But it needs more than a legal team to truly start to see the value of your contracts at scale.

Traditional contract management is time-consuming and prone to errors. But with HyperStart’s AI-powered contract lifecycle management, businesses can cut contract admin time by 80%, accelerate reviews 5x faster, and ensure never missing a renewal again.

Instead of manually tracking contract obligations, HyperStart auto-extracts key contract data with 99% accuracy, enabling businesses to streamline compliance, automate renewals, and minimize legal risks.

HyperStart’s AI-driven platform has helped businesses boost legal operations efficiency by 80%. For instance:

HyperStart helps you simplify, automate, measure contract performance, and get the full value of the different types of contracts you handle. Book a demo to learn how.