Introduction. The Indian Contract Act, 1872 clearly distinguishes between an agreement and a contract. An agreement becomes a contract only when it is enforceable by law. Section 2(e) defines an agreement, whereas Section 2(h) defines a contract. Therefore, while every contract must begin as an agreement, every agreement does not become a contract unless certain essential legal conditions are fulfilled. This distinction is significant because it ensures that only serious, lawful, and enforceable promises receive legal protection. Social obligations, moral commitments, and domestic understandings generally do not qualify as contracts because they lack the intention to create legal relations, as held in Balfour v. Balfour. Hence, enforceability is the key factor that converts an agreement into a contract.
Agreement (Sec 2(e))
An agreement is created when one party makes a proposal and the other party signifies assent. Thus, Agreement = Offer + Acceptance. Agreements may be commercial, domestic, or social; however, only those possessing legal elements become contracts. Agreements of a purely social nature, such as promising to meet a friend, do not have legal force and therefore remain unenforceable.
Contract (Sec 2(h))
A contract is an agreement that is enforceable by law. Only those agreements which satisfy the essential elements mentioned in Section 10 become contracts. Hence, Contract = Agreement + Legal Enforceability. This means courts will only enforce promises that meet legal conditions such as free consent, lawful consideration, and competence of parties.
Why all agreements are not contracts
All agreements are not contracts because many agreements lack one or more legal essentials. Social, domestic, or moral agreements do not intend legal consequences and are therefore not enforceable. For example, a husband's promise to pay monthly allowance to his wife is not a contract. The absence of legal intention and enforceability prevents such agreements from becoming contracts. Moreover, agreements with unlawful objects, uncertain terms, or absence of consideration also fail to qualify as contracts.
Essentials of a valid contract (Section 10)
According to Section 10, an agreement becomes a contract only when the following essential conditions are satisfied:
- Offer and acceptance: There must be a lawful, definite, and clear offer and a complete, unconditional acceptance. Both must be communicated properly. A valid offer and acceptance create the foundational relationship between the parties. Carlill v. Carbolic Smoke Ball Co. established rules for clear communication of an offer.
- Intention to create legal relations: The parties must intend that their agreement should attract legal consequences. Commercial agreements generally have this intention, whereas domestic agreements do not. Balfour v. Balfour is the landmark case on this principle.
- Free consent (Sec 14): Consent must be free and voluntary. Consent obtained through coercion, undue influence, fraud, misrepresentation, or mistake is not free. Contracts formed without free consent are either void or voidable, depending on the situation.
- Capacity to contract (Sec 11): A valid contract can only be entered into by persons who are of the age of majority, of sound mind, and not disqualified by law. A minor's agreement is void, as held in the leading case Mohori Bibee v. Dharmodas Ghose.
- Lawful consideration (Sec 2(d)): Consideration is something of value exchanged between the parties. It must be real, lawful, and not prohibited by law. Agreements without consideration are void unless they fall under specific exceptions provided by the Act.
- Lawful object (Sec 23): The object or purpose of the agreement must not be illegal, immoral, fraudulent, or opposed to public policy. An agreement for an unlawful purpose, such as committing a crime, is void.
- Certainty and clarity of terms (Sec 29): The terms of the contract must be precise and definite. If the terms are vague or unclear, the courts cannot enforce the agreement.
- Possibility of performance (Sec 56): The act promised must be possible to perform at the time of making the contract. Agreements to perform impossible acts are void.
- Not expressly declared void: Certain agreements are expressly declared void by the Act, such as wagering agreements or agreements in restraint of marriage or trade.
- Legal formalities: In some cases, agreements must be in writing, registered, or stamped to become valid. For example, transfer of immovable property requires registration.
Conclusion. It is clear that an agreement becomes a contract only when it satisfies all legal essentials. Agreements lacking legal enforceability, free consent, lawful consideration, or capacity of parties cannot become contracts. Therefore, the statement "All contracts are agreements, but all agreements are not contracts" is entirely correct because only enforceable agreements are treated as valid contracts under law.