Verbal irony is a figure of speech.

  The speaker intends to be

understood as meaning something that contrasts with the literal or usual
meaning of what he says. Sometimes a character will also say one thing,
or believe that one thing will happen, but then the exact opposite turns
out to be true as the story unfolds. Types of verbal irony include:
sarcasm, understatement, and hyperbole

Sarcasm – the speaker says the opposite of what she believes to be true.

Understatement – the speaker downplays the severity or importance of

the actual event or what actually happens.

Hyperbole – the speaker exaggerates or overplays the event.

 An example of verbal irony in Animal Farm is when Squealer tells

the animals, “You don’t want Mr. Jones to come back,” when what
he really means is that, “You don’t want to speak up against us
pigs.” Most examples of verbal irony in Animal Farm can be seen
in the propaganda.

Dramatic irony is when the words and actions of the characters of a

work of literature have a different meaning for the reader than they do
for the characters. This is the result of the reader having a greater
knowledge than the characters themselves.

 An example of dramatic irony in Animal Farm is during any time

the commandments of Animalism are revised or changed. We the
audience and readers know that the pigs are changing the rules to
benefit themselves, but the animals do not have this awareness.

Situational irony is a relationship of contrast between what an audience

is led to expect during a particular situation within the unfolding of a
story's plot and a situation that ends up actually resulting later on. We
the audience believe one thing is going to happen, and we try to predict
it, but then the exact opposite event occurs instead.
  An example of situational irony in Animal Farm is when the pigs
at first try to stop Moses, the crow, from talking about Sugar
Candy Mountain and we the audience are lead to believe that the
animals will no longer accept talking about candy mountains.
However, later on in the novel, Napoleon allows Moses to return
after all, and preach about Sugar Candy Mountain to the animals.
This is a way to manipulate and control the animals so that they do
not think about the terrible situation on the farm.

Additional Information
Irony
Although the word irony is often used very broadly in common speech ("He expected to make a
whole load of money, but ironically he lost it all"), it's best to use it precisely in English papers.

Even when used precisely, it can have a number of meanings, but they all share something: there
is a gap between what is said and what is in fact true. But the gap has to be significant: it can't be
merely a factual error, nor even a lie; the irony depends on the audience's recognition of the gap.

Examples of some of the kinds of irony might make things clearer.

 In verbal irony (sometimes called rhetorical irony), probably the most straightforward
kind of irony, the speaker says something different from what he or she really believes. In
its crudest form it's called sarcasm, where the speaker intentionally says the opposite of
what he or she believes, and expects the audience to recognize the dissembling: for
example, "Rutgers's Hill Hall is truly a palace, suited only to kings and princes." But
 verbal irony needn't be so crude: more subtle kinds of verbal irony, including
understatement and hyperbole, abound.
 In dramatic irony, the audience is more aware than the characters in a work (often, but
not necessarily, a drama), and what the characters say takes on a new significance to the
audience. A famous example of tragic dramatic irony is the opening of Sophocles'
Oedipus Rex, when Oedipus, the ruler of Thebes, promises to punish the man whose sins
have brought a plague upon the city. Oedipus does not know, but the audience does, that
he is himself the evil-doer.

 Situational irony is a relationship of contrast between what an audience is led to expect

during a particular situation within the unfolding of a story's plot and a situation that ends
up actually resulting later on.   It is thus the result of a special sort of discrepancy in
perspective that is not "moment-bound," in that it involves the contrast between what we
knew in one moment with what we have come to know in another.

Of course, like dramatic irony, situational irony can range from the tragic to the comic.  In
comedy, for example, the surprising reversal in circumstances making for situational irony
portends can be for the better.  A classic instance  is the climactic moment in Molière's Tartuffe,
in which the villain Tartuffe, having conned his benefactor Orgon into putting the title to his
property into Tartuffe's name, brings an Officer to Orgon's house to execute an order of eviction
upon the family -- but ends up (to the surprise not only of everyone present but of the audience
as well) being arrested and dragged off to jail as a crook whom the King, in reviewing the cases
coming before the royal courts, has recognized from his past record of criminal activity.

But some of the most famous and powerful uses of situational irony are associated with tragedy,
where it serves to emphasize how uncertain human prosperity, and how fragile human happiness,
can be. 

Sources:
http://andromeda.rutgers.edu/~jlynch/Terms/irony.html
http://www.k-state.edu/english/baker/english287/cc-situational_irony.htm