Introduction to the Concepts of Agreements and Contracts
A common dilemma that surrounds most people is the difference between Agreement and Contract. To a layman, the difference may remain of just the two different words, whereas our lawmakers have defined them to provide a better understanding of the distinguishing factors.
Understanding What is an Agreement?
“A proposal is defined in Section 2(a) of Indian Contract Act as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person to such an act or abstinence, he is said to make a proposal or an offer.”
This gives us the constitutional provision of an agreement. We make an understanding that when one person shows his willingness to do something or to not do something on the proposal of another person is accepting the proposal as mentioned above.
One important distinguishing factor is that an agreement is not legally binding. The agreement between two parties, if breached, cannot be brought legal action against as it lacks legal enforceability.
Understanding What is a Contract?
Contracts on the other hand are an evolved version of an agreement that is enforceable by law, as is accorded in section 2(h) of the Indian Contract act, 1872.
There are three stages to the formation of a contract:
- An offer is made by a party + this offer is accepted by the party to which it is extended= which results in a promise.
- The acceptance+ the consideration of it= result in an agreement.
- The last stage involves the Agreement + legal enforcement that binds it= a contract.
A few conditions must be satisfied in order for an agreement to turn into a contract, which are:
- Two parties
- An agreement
iii. Free consent
- Capacity to enter into a contract
All these conditions constitute the formation of a contract.
The difference between an Agreement and Contract
The major difference lay as can be understood through their definitions.
- An agreement is the acceptance of an offer made along with lawful consideration whereas a contract is an agreement that is legally binding with the power of legal enforcement.
- An agreement is mentioned in section 2(e) of the Indian Contracts Act 1872, a contract on the other is mentioned in section 2(h) of the Indian Contracts Act 1872.
- An agreement is not needed to be documented it is crucial for a contract to be documented in writing and registered.
These are the major differences between agreements and contracts.
From the aforementioned information, a speckle of clarity must be formed, distinguishing the two topics of agreement and contract. “All contracts are agreements, but not all agreements are contracts”. Just because all contracts are formed from the basis of an agreement does not preclude the fact that agreements may differ and hence are not always contracts. The concept of ‘legal enforcement’ plays an important role in telling one part from the other. A person can bring a lawsuit against a person who he entered into a contract with but not one he entered into an agreement with as this term only enables two persons in a contract to avail the legal system.