“All Contracts are Agreements, but all Agreements are not Contracts”

Imagine you’re at a bustling marketplace, where vendors and buyers engage in lively exchanges. Among the banter and negotiations, there’s a special kind of transaction happening—contracts being formed. But what turns a casual chat into a binding agreement recognized by law? 

In the legal realm, not all promises hold the same weight. Sure, agreeing to grab coffee with a friend is nice, but promising to deliver a rare book in exchange for a hefty sum—that’s where contracts come into play.

The Indian Contract Act of 1872 delineates this criteria and draws a distinction between a mere agreement and a legally binding contract, encapsulating the essence of contract formation.

Section 10 of the Indian Contract Act 1872 serves as the cornerstone, stipulating that for an agreement to transform into a contract, it must satisfy several essential elements. Firstly, the consent of all involved parties must be freely given, devoid of coercion or undue influence. This underscores the principle of voluntariness in contract formation.

Moreover, the contracting parties must possess the legal capacity to enter into such agreements. This capacity, known as competency, ensures that parties are legally capable of understanding the terms and consequences of the contract.

Furthermore, the consideration exchanged between parties must be lawful. Consideration refers to the value or benefit promised by each party in exchange for the promises of the other. Legality of consideration ensures that the contract is founded on lawful exchanges, thereby upholding the principles of legality and fairness.

Equally significant is the requirement that the object of the agreement be lawful. This ensures that contracts do not involve illegal activities or purposes contrary to public policy. By stipulating a lawful object, the law seeks to uphold societal norms and prevent contracts that may lead to harm or injustice.

However, it's important to note that not all agreements automatically qualify as contracts. Fundamentally, the process of contract formation begins with an offer or proposal from one party to another. Upon acceptance of this offer, a promise is established, solidifying the agreement. It's this interplay of offer, acceptance, and promise that lays the foundation for a legally binding contract.

Offer ⇨ Promise ⇨ Consideration ⇨ Agreement ⇨ Contracts

WHAT IS AN AGREEMENT?

Section 2(e) of the Indian Contract Act, of 1872 states that “Every promise and every set of promises, forming the consideration for each other, is an agreement.”

Promise + Consideration = Agreement

An agreement can take various forms such as formal or informal, written or oral, as long as it is clear and understandable. Take for instance a scenario where a girl wishes to buy a Barbie doll set from "Little’s Joy" shop. She offers to purchase the set, and when the shopkeeper accepts her offer in exchange for payment, a contract is formed due to the consideration provided (the money in exchange for the doll set). This demonstrates an agreement in action.

WHAT IS A CONTRACT?

According to Section 2(h) of the Indian Contract Act, of 1872, “An agreement enforceable by law is a contract”. This means that a contract is a lawful agreement.

Agreement + Enforceable by Law = Contract

To form a valid contract, it requires both an agreement and legal enforceability. This equation essentially means that a contract is a mutually agreed-upon arrangement between two or more parties that holds legal weight and can be enforced through legal means or binding arbitration.

For a contract to be valid:

• The parties involved must have the legal capacity to enter into the contract, meaning they must be of sound mind and of legal age.

• There must be a clear offer and acceptance between the parties, with each party receiving some form of benefit or consideration.

• The terms of the contract must be specific and not vague or ambiguous.

• The contract must not involve illegal activities or purposes.

Specifically, minors, individuals below the age of 18, lack the legal capacity to enter into contracts in many jurisdictions. Therefore, if a minor enters into a contract, it is generally not enforceable by law.

ALL CONTRACTS ARE AGREEMENTS- For a contract to exist, an agreement is necessary; without an agreement, a contract cannot be formed. It’s akin to the saying, “where there is smoke, there is fire,” highlighting that without fire, there wouldn’t be smoke. Similarly, it can be stated that where there is a contract, there must be an agreement, as a contract stems from an agreement, much like how smoke arises from fire.

ALL AGREEMENTS ARE NOT CONTRACT- Not all agreements qualify as contracts. As mentioned earlier, for an agreement to transform into a contract, it must establish a legal obligation. If an agreement lacks the capacity to create a legally enforceable duty, it does not meet the criteria of a contract. Therefore, an agreement encompasses a broader scope than a contract.

Agreements based on moral, religious, or social grounds—for instance, agreeing to have lunch at a friend’s house or going for a walk together—do not amount to contracts because they are unlikely to generate a legal duty enforceable by law. This is because the involved parties did not intend for these agreements to have legal consequences. Conversely, legal agreements constitute contracts as they establish legal relationships between the parties.

For example, consider a scenario where A invites B to dinner, and B accepts but ultimately does not show up. A cannot sue B for damages in this case because it is a social agreement that does not create a legal obligation. Thus, it does not meet the criteria of a contract.

As previously mentioned, for an agreement to be considered a contract, it must result in a legal obligation. If an agreement cannot impose a duty enforceable by law, it does not qualify as a contract. Consequently, the term "agreement" encompasses a wider range of arrangements compared to "contract."

HOW DOES AN AGREEMENT BECOME A VALID CONTRACT?

Section 10 of the Indian Contract Act explicitly states that agreements that do not fulfill the essentials of a valid contract, as outlined in the Act, are not enforceable by law as contracts. Therefore for an agreement to become  a contract it shall fulfill certain conditions: 

1. They are made with free consent- Section 13 defines consent as the agreement upon the same thing in the same sense by two or more persons. Section 14 specifies that consent is considered free when it is not induced by coercion, undue influence, fraud, misrepresentation, or mistake. Combining Sections 10, 13, and 14, it's established that for a contract to be valid, both parties must consent to it, and there must be a meeting of minds (Consensus Ad Idem). Additionally, this consent must be given freely. In cases of coercion, undue influence, fraud, or misrepresentation, the contract is voidable, meaning it can be canceled by the aggrieved party. However, in instances of bilateral mistake, where both parties are mistaken about a fundamental aspect of the contract, the contract is void from the beginning.

2. Made between two or more competent parties- A contract requires at least two parties who are competent to enter into it. Competency means not being a minor, not of unsound mind, and not disqualified by applicable law.

3. Made for lawful consideration- Consideration is a crucial element in contract law, highlighted in Section 10 and reiterated in Section 25 of the Act, which states that without consideration, an agreement is void. Salmond’s perspective distinguishes between a promise without consideration, which is like a gift, and one made with consideration, which is a bargain. Consideration must be genuine, not illusory, although it doesn’t have to be of equal value. Section 2(d) of the Act defines consideration as an act, forbearance, or promise exchanged at the promisor's desire, providing a reasonable and valuable benefit from the promisor to the promisee. In essence, consideration represents the price of a promise.

4. Made with a lawful object- A contract must have a lawful object, meaning it cannot be against the law, contravene legal provisions, involve fraud, cause harm to others, be morally wrong, or go against public policy. Any contract with an unlawful object is considered void. When we say an agreement is "forbidden by law," it refers to an agreement made for a purpose explicitly prohibited by law, such as selling tobacco without the required license. On the other hand, an agreement that would "defeat the provisions of law" doesn’t directly violate the law but would undermine legal regulations if allowed. For instance, an agreement to sell drugs, while not explicitly illegal, would subvert legal provisions and is therefore unlawful in nature.

5. Not expressly declared to be void- Agreements that cannot be enforced by law are considered void according to Section 2 (g) of the Contract Act. The Act explicitly states certain types of agreements that are void, including:

• Agreements involving gambling (Section 30), 

• Agreements to perform impossible tasks (Section 56), 

• Ambiguous agreements (Section 29), 

• Agreements lacking consideration (Section 25), 

• Agreements with unlawful considerations or objectives (Section 23 and Section 24), 

• Agreements based on mistaken consent (Section 20), and 

• Agreements that restrict marriage (Section 26), trade (Section 27), or legal proceedings (Section 28).

IMPORTANT CASE LAWS

1. Balfour v. Balfour (1919): In this case, the court held that agreements between spouses in a domestic relationship, made without an intention to create legal relations, do not constitute contracts.

2. Mohori Bibee v. Dharmodas Ghose (1903): This case emphasized the importance of free consent and the capacity of parties to enter into contracts. Contracts entered into by parties lacking contractual capacity (such as minors or persons of unsound mind) are voidable.

3. Rose and Frank Co v. Crompton and Brother Ltd. (1925)- The House of Lords stressed the significance of contracts that can be legally enforced. They determined that the orders and acceptances in question were binding in a legal sense, even though the agreement between the parties did not constitute a contract that could be enforced by law. Consequently, because an agency agreement creates a non-legally binding arrangement, legal transactions are not impeded.

4. Durga Prasad v. Baldeo (1880)- The English Court of Appeal considered whether the defendants were eligible for equitable restitution regarding a loan extended to a minor. The Court elucidated the doctrine of equitable restitution, stating that if a minor acquires property or goods by misrepresenting their age, they can be required to return it as long as it can be traced to their possession. The Court also clarified that the obligation to make restitution ends once repayment begins, and equitable principles do not enforce contractual obligations against minors.

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