An agreement is a mutual understanding between parties, but not all agreements are legally enforceable. A contract is a legally binding agreement that meets specific legal criteria like offer, acceptance, and consideration. Simply put, all contracts are agreements, but not all agreements are contracts.

Contracts and agreements are essential concepts in law, especially in business and commerce.

These terms are often used interchangeably in everyday language, but from a legal standpoint, they have distinct meanings.

To clarify the nuances, in this article we will discuss the differences between contracts and agreements, the elements that transform an agreement into a contract, and how the law treats various agreements.

What Is an Agreement?

An agreement is essentially a mutual understanding between two or more parties about their respective rights and obligations.

According to Section 2(e) of the Indian Contract Act, 1872,

“every promise and every set of promises forming consideration for each other is an agreement.”

In simpler terms, when two parties exchange promises, they enter into an agreement.

For example, if A agrees to sell his car to B for ₹1,00,000, and B agrees to pay this amount, the promises made by A and B constitute an agreement.

What Is a Contract?

A contract, on the other hand, is a specific type of agreement that is enforceable by law. Section 2(h) of the Indian Contract Act, 1872 defines a contract as

“an agreement enforceable by law.”

For an agreement to be considered a contract, it must meet certain legal conditions. These include lawful consideration, the competence of parties, free consent, and a lawful object.

In essence, a contract is an agreement that is backed by the force of law, which means if any party breaches the terms of the contract, the aggrieved party can seek legal remedy.

Difference Between Agreement and Contract

The most significant difference between an agreement and a contract is enforceability.

All contracts are agreements because they require mutual promises, but not all agreements are contracts because they may lack the elements that make them enforceable by law.

For instance, a social agreement, like a promise to meet a friend for lunch, is not enforceable by law.

However, a business deal involving the sale of goods or services, where both parties intend to create legal obligations, can be enforceable as a contract.

This distinction can be better understood through the statement: “All contracts are agreements, but all agreements are not contracts.”

Difference Between Agreement and Contract

Formation of an Agreement

To form an agreement, the following essential elements must be present:

1. Offer or Proposal (Section 2(a)): An agreement begins with one party making a proposal or offer to another. For example, if A offers to sell his car to B for ₹1,00,000, this is an offer.
2. Acceptance (Section 2(b)): Once the offer is made, the other party must accept it. If B agrees to buy the car for ₹1,00,000, this becomes an acceptance.
3. Consideration (Section 2(d)): Consideration is the price for the promise made in the agreement. It can be money, goods, services, or even an act of omission. In our example, A’s consideration is the car, and B’s consideration is ₹1,00,000.
4. Mutual Promises (Section 2(e)): The exchange of promises between the parties completes the formation of an agreement.

Formation of a Contract

Essential Elements of a Contract:

• Offer
• Acceptance
• Consideration
• Competence of parties
• Free consent
• Lawful object

For an agreement to become a contract, it must fulfill additional conditions:

#1 Competence of Parties (Sections 11 and 12)

The parties must be legally competent to enter into a contract. According to the Indian Contract Act, a person is competent to contract if they:

• Are of the age of majority (18 years in India).
• Are of sound mind, meaning they can understand the terms of the contract and the consequences of entering into it.
• Are not disqualified from contracting by any law, such as in cases of insolvency.

For example, a contract entered into by a minor (under 18) or a person declared mentally unsound is void, as they are not competent to contract.

#2 Free Consent (Section 14)

The consent of the parties must be free, meaning it should not be obtained through coercion, undue influence, fraud, misrepresentation, or mistake.

If any of these elements are present, the contract may become voidable at the option of the aggrieved party.

For instance, if A sells a car to B but misrepresents the car’s condition, B can later void the contract based on fraud.

#3 Lawful Consideration and Object (Section 23)

The consideration and object of the contract must be lawful. An agreement to do something illegal, immoral, or against public policy cannot be enforced as a contract.

For example, an agreement to sell illegal drugs would be void from the outset as the object is unlawful.

#4 Not Declared Void (Section 10)

Certain types of agreements are expressly declared void under the Indian Contract Act, such as agreements in restraint of marriage, trade, or legal proceedings.

Void and Voidable Contracts

Some agreements may be declared void or voidable:

• Void Agreements: An agreement that is not enforceable by law is called void. These agreements lack one or more of the essential elements that make a contract enforceable. For example, an agreement entered into by a minor is void because minors are not competent to contract.
• Voidable Contracts: A voidable contract is initially valid and enforceable but can be made void at the option of one of the parties. This typically happens in cases where free consent is absent. For example, a contract entered under coercion or undue influence is voidable at the discretion of the party who was coerced.

An agreement that cannot be enforced by law is called void. For instance, agreements entered into by a minor are void. A contract that is valid but can be voided by one party due to circumstances like coercion or misrepresentation is called Voidable.

Illustration of Agreements and Contracts

Example 1: Social Agreement

A promises B that they will watch a movie together next week. B agrees. This is an agreement between A and B because there is a mutual understanding (promise), but it cannot be enforced in a court of law. If A or B fails to show up for the movie, the other party cannot sue them. This is merely a social agreement, not a contract.

Example 2: Business Contract

A offers to sell B a car for ₹1,00,000, and B agrees to the terms. This agreement involves an offer, acceptance, and consideration, and since the purpose is lawful, it is a valid contract. If A refuses to sell the car after the agreement, B can sue A for breach of contract because it is enforceable by law.

Example 3: Void Agreement

If A, who is 17 years old, agrees to sell his bike to B, this agreement is void because A is a minor and, therefore, not competent to contract. Even if B has already paid for the bike, B cannot enforce the agreement in court because it is void from the beginning.

Example 4: Voidable Contract

A sells B a car but lies about the car’s manufacturing year, saying it was made in 2019 when it was actually made in 2015. This is a case of misrepresentation. B can either continue with the contract or declare it void because B’s consent was not free. This is an example of a voidable contract.

Case Laws Illustrating the Concept

The difference between agreements and contracts is better understood through landmark cases. Below are some cases that highlight the principles discussed above.

Case 1: Balfour v. Balfour (1919)

In this case, a husband promised to pay his wife a monthly allowance while he was abroad for work.

Later, the couple separated, and the wife sought to enforce the promise in court. The court held that this was a domestic agreement and not intended to create legal obligations.

Therefore, it was not enforceable as a contract. This case exemplifies the idea that not all agreements are contracts, especially in the realm of domestic and social relationships.

Case 2: Carlill v. Carbolic Smoke Ball Co. (1893)

In this case, the Carbolic Smoke Ball Company offered to pay £100 to anyone who used their product as directed and still contracted influenza. Mrs. Carlill used the product but caught the flu, so she sued for the £100.

The company argued that there was no binding contract. However, the court ruled that there was a valid contract because the offer was made to the public, and Mrs. Carlill accepted it by performing the conditions set out in the offer.

This case highlights how an agreement can become a contract when it is legally enforceable.

Case 3: Mohori Bibee v. Dharmodas Ghose (1903)

In this case, a minor mortgaged his property in favor of a moneylender. Later, the minor sued to have the mortgage declared void.

The Privy Council ruled that since the minor was not competent to contract, the agreement was void from the outset.

This case clearly demonstrates the principle that agreements entered into by parties who are not competent to contract are void.

Conditions That Make an Agreement Enforceable (Contract)

For an agreement to transform into a contract, certain essential conditions must be met. These conditions include:

#1 Lawful Object and Consideration

The object and consideration of the contract must be lawful. An agreement to perform an illegal act, such as selling drugs, is not enforceable.

Contracts made for lawful purposes are valid.

#2 Free Consent

Consent must be freely given without any form of coercion, undue influence, fraud, or misrepresentation.

If these elements are present, the contract becomes voidable at the discretion of the affected party.

#3 Legal Competence

Both parties must be legally competent to enter into a contract. A person who is a minor or of unsound mind cannot legally enter into a contract.

If an incompetent person attempts to contract, the agreement is void from the beginning.

#4 Intention to Create Legal Relations

The parties to an agreement must intend to create legal relations. This is often the difference between a social or domestic agreement and a legally enforceable contract.

For example, an agreement between friends to go out for dinner does not constitute a contract, as there is no intention to create legal obligations.

Importance of Understanding the Difference

In business and everyday life, understanding the difference between agreements and contracts is crucial.

While an agreement may represent a mutual understanding between parties, it does not necessarily create legal obligations.

On the other hand, a contract ensures that the parties are legally bound to fulfill their promises, offering legal protection in case of breach.

This understanding is particularly vital in business transactions where contracts are regularly used to protect the interests of the parties involved.

Contracts provide legal recourse in case of non-performance, offering remedies such as damages, specific performance, or cancellation of the contract.

Practical Implications in Business and Commerce

In commercial transactions, contracts play a vital role in ensuring smooth and enforceable deals.

From employment contracts to sale agreements, every transaction that involves rights and obligations can be formalized into a legally enforceable contract.

Contracts in Business

For instance, in a sales contract, one party promises to deliver goods, while the other promises to pay for them.

If one party fails to fulfill their promise, the other can take legal action to enforce the contract.

This legal backing gives businesses the confidence to engage in large and complex transactions, knowing that the law protects them from breaches of contract.

Agreements in Social and Domestic Settings

In contrast, agreements made in social or domestic settings, such as promises between family members or friends, are generally not intended to be legally binding.

These agreements often lack the intention to create legal relations, which is one of the critical components of a contract.

Importance of Free Consent and Lawful Object

The elements of free consent and lawful object ensure that contracts are fair and not coercive.

Contracts obtained through force, manipulation, or deception undermine the principle of fairness and are voidable.

The law ensures that all parties have the freedom to enter into contracts without pressure and that the object of the contract is morally and legally sound.

For instance, a contract to sell stolen goods would be considered void due to the unlawful object, while a contract obtained through threats would be voidable at the discretion of the threatened party.

Verdict

While all contracts are agreements, not all agreements become contracts. The enforceability of an agreement depends on several legal factors, such as free consent, lawful object, competence of the parties, and intention to create legal relations.

Understanding these distinctions is critical, especially in business dealings where contracts provide legal safeguards and remedies.

The line between agreements and contracts underscores the broader idea that not every promise or understanding between parties carries legal weight.

Social, domestic, and morally unenforceable agreements remain as simple agreements, without the power to compel action through the courts.

Conversely, contracts, through the fulfillment of legal requirements, offer the means to ensure fairness, accountability, and justice in transactions.

Therefore, it is essential to recognize when an agreement evolves into a legally enforceable contract to protect your rights and interests.

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FAQs

1. What is the difference between an agreement and a contract?

An agreement is a mutual understanding between parties that may not be legally enforceable, while a contract is a legally binding agreement that meets specific legal criteria, such as offer, acceptance, and consideration.

2. Can all agreements become contracts?

No, not all agreements can become contracts. For an agreement to qualify as a contract, it must meet specific legal requirements, including legal enforceability, consideration, and the competency of parties involved.

3. What are the essential elements of a valid contract?

A valid contract must include: (1) offer, (2) acceptance, (3) consideration, (4) competent parties, (5) free consent, and (6) a lawful object.

4. What is a void agreement?

A void agreement is an agreement that is not enforceable by law from the moment it is created. This can occur if it involves illegal activities or if one party is not competent to contract.

5. Are verbal agreements legally binding?

Yes, verbal agreements can be legally binding if they meet the essential elements of a contract. However, proving the terms of a verbal agreement can be more challenging than a written one.

6. Can minors enter into contracts?

Generally, contracts with minors (under 18 years) are voidable at the minor’s discretion. This means minors can choose to affirm or void the contract upon reaching the age of majority.

7. What makes an agreement voidable?

An agreement becomes voidable when it is enforceable at the option of one party, usually due to factors such as coercion, undue influence, misrepresentation, or fraud.

8. How can I ensure my agreement is enforceable?

To ensure your agreement is enforceable, make sure it meets all the essential elements of a contract, including legal consideration, the competency of parties, and free consent.