A contract may relate to virtually any type of transaction. Contracts may relate to performance of a service, sale, or transfer of ownership of property, or a combination of these types of transactions. Parties to a contract may be individuals, partnerships, corporations, or even governments. There may be more than two persons to a contract. With some exceptions, only the parties making a contract have rights or duties under the contract.
It is possible for other persons to have rights and duties with respect to a contract other than the original parties to the contract. For example, rights under a contract may be assigned to a third person. Also, a contract may be made for the benefit of a third person as in a life insurance contract. A life insurance contract involves the insurance company, the insured, and the beneficiary.
A valid contract is a legally-binding contract that is made in accordance with all legal requirements. A voidable contract is an agreement that would be binding and enforceable except the circumstances surrounding its execution, or the fact that one of the parties lacks “capacity,” makes the contract voidable at the option of one of the parties. For example, a person who has been forced to sign an agreement may avoid being bound by the agreement. A void agreement is an agreement which is without legal effect. For example, an agreement which deals with the performance of an illegal act is void.
An executed contract is a contract that has been completely performed. Nothing remains to be done by either party. For example, if you go into a furniture store and agree with the salesman to pay $400.00 for a chair and then pay the salesman cash and take delivery of the furniture, the contract has been completely executed. In an executory contract, something remains to be done by one or both of the parties. If a contract is executed between a seller and a buyer regarding the purchase of land, and both parties agree that the sale will be consummated after the buyer obtains his loan and the seller gives a certificate of title (showing no defects), the contract is enforceable, but it is said to be executory.
An option contract is a contract that gives the right to one party to enter into a second contract with the other party at a later date. One of the most common forms of option contracts deals with the sale of real estate. In this type of contract, the prospective buyer will be granted an option to purchase the property within a specified period of time. The prospective buyer will pay the seller a sum of money since the seller is, in effect, taking the property off the market during the option period. If the prospective buyer exercises his option during that time, a second contract is entered into regarding the sale of the property. If the option period expires, then neither party has any obligation to the other. The money paid to the buyer for the option is retained by the buyer.