This article is authored by Sujata Porwal, third year BA LLB (Hons.) student at Symbiosis Law School, Pune. The article focuses on intricacies of a contract and agreement. it presents an in-detail analysis of difference between an agreement and contract.
Contracts play a crucial role in our day-to-day lives. We enter into innumerable contracts and agreements throughout the day. A menial daily job like purchasing essentials from a store or booking a cab can be classified as an agreement or a contract. Therefore, it is imperative to understand the contract-agreement analogy and differentiate wisely between a contract and an agreement. With the rapid development in various societal dynamics, one must be aware of the intricacies associated with the legality of the same.
What is an Agreement?
An agreement is the manifestation of shared and reciprocated assent by two or more people. In other words, an agreement reflects meeting of minds between two individuals through the mode of offer and acceptance. An agreement is inclusive of narrower terms like promise, contract or bargain. Agreement can be depicted through words, conduct or even silence depending on the situation to which the parties are subjected. An agreement can acquire different meanings in different situations.
Essentials of an agreement include:
- Two or more parties
- Meeting of minds
Different jurisdictions have woven different definitions for the term agreement. An agreement in Washington is a manifestation of mutual consent that doesn’t carry mandatory legal implications. The identical term in Pennsylvania has a reverse meaning attached to it. An agreement in Pennsylvania resonates an enforceable contract where the intent of parties is to enter into a binding agreement. Similarly, in California, there is a distinction between ‘final agreement’ as well as an ‘agreement to agree’. The variance is determined by the intent of the parties.
- If a 7-year-old girl purchases candy from a nearby shop then she enters into an agreement with the vendor. In this case, she must also pay a consideration in exchange for the candy, however; the agreement would still not qualify as a contract under Indian law because the Indian Contract Act, 1872 mandates that a contract must only be entered by an adult.
- If A agrees to visit C on Sunday for dinner and C makes necessary arrangements for the same, then A and C have entered into an agreement. However, if A fails to visit C due to some emergency, C cannot sue A for the breach of their agreement. The reason behind the same is that A and C did not enter into a valid contract, rather it was merely a social agreement.
Under the criminal law of India, the offence of conspiracy necessitates that one must enter into an agreement to commit an unlawful act. Herein, the agreement needn’t be explicit in nature, rather, meeting of minds can be inferred according to the situation.
What is a Contract?
A contract can be defined as an agreement of two or parties to create mutual legal obligations. The parties must agree to do or to not do something in exchange for a valid consideration. A contract can thus be summarized as an agreement that is legally enforceable.
The sine qua non of a valid contract are:
- Intention to create legal obligations
- Mustn’t be explicitly declared void
Similar to agreements, contracts can be both oral or written in nature. Although, the law mandates certain contracts to be written like a sale deed. Besides, the difficulty synchronized with proving an oral contract often deters individuals from entering into oral contracts. The inability to enforce them in the court of law shakes the basic foundations of entering into a contract instead of an agreement.
A contract, based on its legal validity, can be classified as:
- Valid contract
- Void contract
- Voidable contracts
- Illegal contracts
- Unenforceable contracts
The classification of contracts based on their validity in the legal aspect are inclusive of an interesting concept of voidable contracts where one party has the option of rendering a valid contract void upon being misinformed by the other party. For example, if A sells a refrigerator to B stating that the refrigerator was purchased 4 years ago when in reality it was purchased 6 years ago, then it is on B’s discretion to decide whether the contract should be valid or void.
- A agrees to purchase 10 Kgs of watermelons for a farmer B at the rate of 15 Rs. per Kg. As soon as B delivers the watermelons to A and A pays the definite amount of money agreed upon by them, the contract would be successfully executed.
‘All contracts are agreements but all agreements are not contracts’
It is not uncommon to find several instances where a contract is confused with an agreement or vice-versa. Let us look at some examples in order to understand the difference between agreements and contracts:
- I gift my pen to a friend before the exam with a good luck note attached to it. This is an example of an agreement but cannot be categorized as a contract since there was no consideration given to me in exchange for the pen.
- Raju hires Soham to kill Aisha after she disagrees to marry him. The agreement between Raju and Soham will not be termed as a valid contract since the consideration for the contract is illegal in nature, rendering the whole contract as illegal.
- Zoya invites her friends to her birthday party. All of them agree to attend her birthday and Zoya makes all the necessary arrangements accordingly. However, only 2 of her friends actually attend her birthday party. The promise of her friends to attend the party cannot be deemed as a valid contract since there was no intention to enter into a legal obligation.
The aforementioned examples clear the vision with regards to the difference between a contract and an agreement. The key differences between an agreement and contract, as necessitated by the Indian Contract Act, 1872 are:
- A contract can be entered into by competent parties only
The Indian Contract Act, 1872 lays few ground rules that must be followed while entering into a contract. One such rule states that a contract can only be entered by ‘competent parties’. The term competent party refers to a party that:
- has attained the age of 18 years or above/ the age of majority
- has a sound mind
- has not been disqualified, from entering into a contract, by law
If an agreement is entered into by a person who violates the criterions of a sound mind or is disqualified by law, then such contract shall be rendered void. However, a contract by a minor is considered to be void-ab-initio (void from the very beginning). Under all these circumstances, the contract is not enforceable by the law.
- Inder Singh v. Parmeshwardhari Singh – the ratio of the case revolved around the fact that a person entering into a contract must withhold the capacity to form a rational judgement about the terms and conditions of the contract along with its consequences. The hon’ble judge also held that unsoundness of mind cannot be equated with lunacy.
- Mohori Bibee v. Dharmodas Ghosh – the court in this case concluded that a contract involving a minor is not voidable in nature. Rather, it shall be deemed to be void-ab-initio. The minor in the present case had mortgaged his property to obtain a loan. The mortgage was rendered to be void and inoperative.
The head of ‘person disqualified by law’ is inclusive of various subheads including alien enemy, foreign sovereigns, corporations, insolvent etc. It can thus be concluded that the law has set different guidelines for different sets of people stating whether they are eligible to enter into a contract or not.
- The parties to a contract must have a free consent while entering into a contract
Section 13 of the Indian Contract Act, 1872 mandates that the parties must be willing to enter into a contract without any undue influence or pressure. In other words, the parties must give free consent to be bound by the terms of the contract. The consent can be oral or written and expressed or implied. It is also necessary that both the parties give their consent for the same thing. For example, if A and B agree for the exchange of their cars where A thinks that both of them possess the same model of Honda City in different colors, however, B is under the impression that A wants to exchange his Honda City for B’s i20. This would not lead to a legally binding contract between them.
The essentials of a free consent direct that the consent must NOT be obtained by:
- Coercion (Section 15)
- Undue Influence (Section 16)
- Misrepresentation (Section 18)
- Fraud (Section 17)
- Mistake (Section 20, 21, 22)
- Chikkam Ammiraju v. Chakkam Seshamma – the court analyzed that the threat posed by coercion is not restricted to the person who is being forced to enter into a contract. Explained simply, coercion can be indirect in nature and that someone can be threatened to enter into a contract by pointing a gun at his/her family or any person potentially important to him.
- Raghunath Prasad v. Sarju Prasad – the courts evolved a stage-by-stage analysis of interpreting a case linked with undue influence. The first stage is to assess whether a person had a dominating position over other or not. Further, it should be ascertained whether the contract was induced by undue influence or not. The last stage reflects the question of onus probandi.
- Raj Kumar Soni & Anr v. State of U.P. & Anr – one of the landmark cases stating that one of the parties suppressed certain material facts during the contract and have acquired additional benefit resulting from such suppression. The courts often step-back when such parties claim their contractual rights in the court.
- Lilly Kutty v. Scrutiny Committee – the hon’ble bench adjudicated that fraud impairs every solemn act and is not encouraged by courts. A false certificate was attained in the present case in the greed of unfair advantages. The court held that any act that subverts the basic purpose of the constitution shall be construed as a fraud.
- State of Maharashtra v. Mayer Hans George – in the present case, A, an officer of the court arrests Z instead of Y under the honest belief that Z is indeed Y. The arrest was made with bona fide intention and was therefore categorized as a mistake of fact.
- The objective behind the contract and the consideration must be lawful
The consideration offered in the contract must not be unlawful in nature. An unlawful consideration can be categorized as one that is:
- Forbidden by law
- If permitted, invalidates the provision of a law
- Inflicts injury to person or property
- Opposed to public policy or immoral
An agreement with unlawful consideration is labelled as a void contract. Examples of unlawful considerations include bribing a police officer or hiring a contract killer among others.
- The terms of the contract mustn’t be declared void by any law of the country
The category of agreements that are expressly declared void by the laws of a country are not enforceable in the court of law as well. Such agreements do not result in valid legal obligations on the parties.
Some such agreements in India are:
- Agreements in restraint of marriage
- Wager or betting
- Agreements to finish impossible acts
- Agreements restraining legal proceedings
- Agreements in restraint of trade
If Karim agrees to marry Noor on the condition that she will not work for the rest of her life then such agreement is not valid in the eyes of law and therefore does not create any binding obligation on Noor, restraining her from working.
The thin line of demarcation between a valid contract and an agreement leads to confusion. One must therefore stay aware of the intricacies involved within the definitions of a contract and an agreement.
Indian Contract Act, 1872
 Inder Singh v. Parmeshwardhari Singh AIR 1957 Pat 491
 Mohori Bibee v. Dharmodas Ghosh (1903) 30 Cal. 539
 Chikkam Ammiraju v. Chakkam Seshamma, A.I.R. 1917 Mad 288
 Raghunath Prasad v. Sarju Prasad, AIR 1924 PC 60
 Raj Kumar Soni & Anr vs State of U.P. & Anr CIVIL APPEAL NOs. 1763 OF 2007
 Lilly Kutty v. Scrutiny Committee
 State of Maharashtra v. Mayer Hans George 1965 AIR 722
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