All squares are rectangles but all rectangles are not squares!! Now that was an easy high school fact which people good at Mathematics can grasp. For law students, the context switches the main terms used here. It turns to "All Contracts are agreements But all agreements are not contracts". This fundamental principle under the Indian Contract Act, 1872, continues to distinguish a legally enforceable contract from a mere agreement. But aren’t these two terms one and the same thing? Know the difference between agreement and contract with the explanations below.
Law of Contract in India
The Indian Contract Act was passed by the legislature in 1872. But, even though the Indian Contract Act is still the main act in relation to contracts in India, interpretation of the act has changed with time due to judicial decisions and other acts such as the Information Technology Act, 2000, that recognize the electronic formation of contracts..
However, various amendments have been brought in the same since it was enacted two centuries back to fulfill the needs that arose with time. The law mainly governs the very basic needs of a society, i.e. contracts. People often misunderstand a contract with what has been reduced to writing and has been signed by the parties concerned.
In day-to-day lives, we all make contracts, whether we are at the grocery shop or a supermarket, accepting a job offer letter or renting out a property. One may resort to a civil lawyer in Kolkata for property related contracts in Kolkata before signing one. Understanding the basics of a contract is a must. Consultation with contract lawyers in India can save them from any unexpected trouble.
Note: Today, contracts can now be entered into in either of the two ways – physically or electronically. There is a change in the mode of creation of contracts, but the essential elements of a valid contract under the Indian Contract Act have not changed at all.
What is an Agreement in Contract Law?
Where there is an offer made by one person and is accepted by another, it is a promise. As per the Section 2 (e) of the Indian Contract Act, where there is a promise between two parties involving a certain consideration, it is an agreement. The most important part is that as per the Section 2 (h) of the same Act, when an agreement is legally enforceable, it becomes a contract. Thus, the key difference between contract and mere agreement is that an agreement in compliance with the applicable laws is a contract. However, an agreement that lacks compliance with the requisite legal conditions, it remains an agreement which is not enforceable in the court of law.
Essentials of a Contract
- Offer and Acceptance
- Mutual Consent
- Free Consent
- Consideration
- Competent Parties
- Legal Purpose
The difference between agreement and contract can be depicted through the above essentials of a valid contract whereby offer, acceptance and mutual consent sum up what we call an agreement. However, all the additional pointers altogether in this regard make up a contract. When one of these elements is missing, it is no more a legally enforceable contract but a mere agreement. In case of confusion involving some financial interests in Kolkata, a lawyer in Kolkata may help.
Smart Contracts and E-Agreements (New Section)
As companies rely on online transactions in increasing numbers, e-agreements have come to be a part of business transactions in India. Transactions through emails, websites, mobile apps, click-wrap, browse-wrap and other digital sources can constitute valid agreements. According to Section 10A of the Information Technology Act, 2000, a contract should not be denied the status of legality due to being made through electronic modes. However, such agreements need to meet the basic requisites of a valid agreement under the Indian Contract Act, 1872.
Smart contracts are another type of agreement which are gaining popularity among businesses due to being digitally executable using blockchain technology. Though there is no separate law dealing with smart contracts in India, the enforceability of such agreements is determined in accordance with the existing laws of contract. In case the consent of the parties is freely given, it is backed by valid consideration and lawful object, it can constitute a valid agreement.
Therefore, irrespective of whether a contract is executed on paper or through electronic technology, the fundamental legal principle remains unchanged—"All contracts are agreements, but all agreements are not contracts."
Void Agreements
Agreement in restraint of marriage[1] - If an agreement restricts someone from marrying another or even a particular person, it is void from the very beginning (void ab initio). Thus, even if there is due process followed from offer to acceptance and consideration, if it regards to restraining someone from right to marry, it is not lawfully enforceable and thus, not a contract.
- Agreement in restraint of trade[2] - Right to trade or business is a fundamental right[3] as per the Article 19 (1) (g) of the Constitution. If an agreement forces another not to engage in trade, even if in return of a consideration, it is void and thus ineffective.
Updated Note: Reasonable restrictions which are explicitly recognized in law, both statutory exceptions and judicial exceptions based on Section 27 of the Indian Contract Act, 1872, can still be enforced on the basis of the facts of the case.
Agreement in restraint of legal proceedings[4] - If there is some clause or whole agreement that restricts the parties resorting to legal remedies, it is restricting the basic rights of a person. Thus, it is also not effective to be a legally enforceable contract.
Agreements having uncertainty of context[5] - Where there is some kind of uncertainty in understanding the context of terms mentioned in an agreement, it is not a valid one.
Updated Note: Modern business dealings normally avoid any ambiguity through the inclusion of clear definitions, choice of law provisions, dispute resolution procedures and contractual duties and responsibilities.
Agreement by way of wager[6] - A contract of wager is illegal per se and thus, such an agreement can not be said to be enforceable by law.
Updated Note: Although agreements which are based on wagers are void in accordance with the Indian Contract Act, the legal position concerning online gaming is still evolving.
Agreement to perform impossible act[7] - Where there is an act agreed upon which is impossible to do, performance of the same can not be forced through law. Hence, such an agreement can also not be regarded as a contract.
Difference Between Agreement and Contract with Example
People often refer to a contract as well as an agreement synonymously. However, the difference between contract and mere agreement is huge. "All Contracts are agreements, but all agreements are not contracts" is the first term which law students get to hear when lectures under law of contract begin. What is an agreement in contract of law is crucial to understand for those whose interests are at stake, be it a law student or someone planning to enter an official contract with another for business purposes. In Kolkata, it is better to contact a Kolkata contracts lawyer to understand the basic context in this regard.
It should be noted that an agreement is one of the many ingredients of a contract. However, an agreement on its own does not constitute a contract as per law. An agreement between two people to have a cup of tea by contributing together is not legally enforceable one. However, an agreement to buy tea bags in return of a certain amount of money is legally binding and thus, forms a contract. The table below reiterates the key difference between agreement and contract in a clear manner. It directly refers to what has been provided under the Indian Contract Act, 1872.
Legal Difference Between Agreement and Contract
|
Particulars |
Agreement |
Contract |
|
Section |
Agreement is defined under Section 2(e) of the Indian Contract Act, 1872. |
A contract is defined under Section 2(h) of the Indian Contract Act, 1872. |
|
Definition |
Every promise(s) forming the consideration for each other, is an agreement as per the Act. |
An agreement enforceable by law is a contract as per the Act. |
|
Essentials |
An offer and its acceptance eventually form an agreement. |
When an agreement is enforceable by law, it becomes a contract. |
|
Scope |
Scope of an agreement is too wide. |
Scope of contract is limited since it has to comply with numerous conditions. |
|
After Effects |
Not all agreements create legal obligations upon the parties. |
All contracts lead to legally obliged parties unless there arises some legal exception. |
|
Nature |
An agreement can be legal as well as illegal. |
A contract has to be legal to be effective. |
|
Inter-relation |
An agreement is preliminary to a contract. |
A contract can not be entered into without agreement of parties. |
|
Example |
An agreement to attend a party whereby gifts have to be sent is a social gesture and not a legal obligation. |
An agreement to attend a social event whereby entry is available through paid tickets is a valid contract enforceable under law. |
Key Takeaway
From the above comparison, it is clear that agreement is the basis of any contract. But agreements, which satisfy all the requirements as specified by the Indian Contract Act, 1872, alone qualify to be termed as enforceable contracts. That is why this maxim still continues to be relevant in today’s world of digital economy:
"All contracts are agreements, but all agreements are not contracts."
Electronic Agreements vs Traditional Agreements (New Section)
In the current scenario, where the world of business is witnessing a shift towards digitization of transactions, contracts no longer remain restricted to being paper-based. Electronic agreements have come into practice to conduct online purchases, software licensing, employee onboarding processes, banking activities, etc. The following comparison brings out the differences between the two types of agreements.
|
Particulars |
Traditional Agreement |
Electronic Agreement (E-Agreement) |
|
Mode of Execution |
Executed physically on paper. |
Executed electronically through emails, websites, mobile applications or digital platforms. |
|
Signature |
Physical signature of the parties. |
Electronic Signature or Digital Signature, wherever legally recognised. |
|
Legal Recognition |
Recognised under the Indian Contract Act, 1872. |
Recognised under the Indian Contract Act, 1872 read with the Information Technology Act, 2000. |
|
Enforceability |
Depends upon fulfilment of the essential elements of a valid contract. |
Depends upon the same essential elements of a valid contract. The electronic mode does not affect enforceability by itself. |
|
Common Examples |
Property agreements, sale deeds, lease deeds, partnership deeds. |
Click-wrap agreements, online service terms, e-commerce transactions, digital employment contracts, software licence agreements. |
Conclusion
Although the context of understanding the difference between agreement and contract might seem to be a lawyer's business. However, since the layman is the one that enters a contract in India, the laws apply at the very time of transaction. Thus, it is crucial to know beforehand the difference between contract and mere agreement.
Regardless of whether the deal is made verbally, put down in writing, done electronically, or using new technology forms like smart contracts, the legal standpoint remains essentially the same. While every contract starts with an agreement, the only agreements that meet the stipulated conditions of law as laid down in the Indian Contract Act of 1872 become contracts.
This understanding helps parties to engage in legally valid deals and avoid making unenforceable deals. As business deals change with technology advancement, this ageless legal principle still stands true even today as it stood when the Indian Contract Act was formulated.
"All contracts are agreements, but all agreements are not contracts."
[1] Section 26 of the Indian Contract Act, 1872.
[2] Section 27 of the Indian Contract Act, 1872.
[3] Part III of the Constitution of India, 1950.
[4] Section 28 of the Indian Contract Act, 1872.
[5] Section 29 of the Indian Contract Act, 1872.
[6] Section 30 of the Indian Contract Act, 1872.
[7] Section 56 of the Indian Contract Act, 1872.
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