1. ‘All contracts are agreements but all agreements are not contracts.

’
Discuss.

A contract is a legally binding agreement or relationship that exists between two or more
parties to do or abstain from performing certain acts. A contract can also be defined as a
legally binding exchange of promises between two or more parties that the law will
enforce. For a contract to be formed an offer made must backed acceptance of which
there must be consideration. Both parties involved must intend to create legal relation on
a lawful matter which must be entered into freely and should be possible to perform.

An agreement is a form of cross reference between different parties, which may be

written, oral and lies upon the honour of the parties for its fulfillment rather than being in
any way enforceable.

All contracts are agreements because there must be mutual understanding between two
parties for a contract to be formed. All parties should agree and adhere to the terms and
conditions of an offer.

The following cases illustrate ways in which all contracts are agreements;

●In the case of invitation to treat, where an invitation to treat is merely an invitation to
make an offer. When a firm's offer is accepted it results into a contract provided other
elements of contracts are accepted.

●Considering person A buying a radio on hire purchase from person B who deals with
electronics and its appliances. Both parties must come to an agreement on payment of
monthly installment within specified period of time. Such an agreement result in a
specialty contract which is a contract under seal.

All contracts are agreements until it becomes void for instance, a voidable contract where
one of the parties can withdraw from it if s/he wishes. This occurs due to a minor entering
into an agreement, misrepresentation or undue influence. Considering a case where
person A makes a contract with person B but during the contract period B realizes that he
performed the agreement under undue influence.

Definition of Contract

As defined by the Indian Contract Act of 1872 1 “An agreement enforceable by law is a
contract. From the above definition, we perceive that a contract essentially consists of
two elements:

● There is an agreement and;

● The said agreement is enforceable by law.

We shall now examine these elements detail.

1. Agreement.

As per section 2 (e): " Every promise and every set of promises, forming the
consideration for each other, is an agreement." Thus it is clear from this definition that a
'promise' is an agreement. What is a 'promise'? The answer to this question is contained in
section 2 (b) which defines the term." When the person to whom the proposal is made
signifies his assent thereto the proposal is said to be accepted. A proposal, when
accepted, becomes a promise."

An agreement, therefore, comes into existence only when one party makes a proposal or
offer to the other party and that other party signifies his assent (i.e., gives his acceptance)
thereto. In short, an agreement is the sum total of 'offer' and 'acceptance'.

On analyzing the above definition the following characteristics of an agreement become

evident:

1
Section 2(h) of the Indian Contract Act, 1872
(a) At least two persons. There must be two or more persons to make an agreement
because one person cannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject
matter of the agreement in the same sense and at the same time.

2. Legal obligation.

In order to become a contract, an agreement should be enforceable by law. An agreement

becomes enforceable only when it is coupled with obligation. Section 10 of the Act lays
down the condition of enforceability. It goes on to state that “ All the agreements are
contracts if they are made by the free consent of the parties competent to contract for a
lawful object and are not expressly declared to be void.”

As stated above, an agreement to become a contract must give rise to a legal obligation
i.e., a duty enforceable by law. If an agreement is incapable of creating a duty
enforceable by law, it is not a contract. Thus an agreement is a wider term than a contract.
" All contracts are agreements but all agreements are not contracts,"

Agreements of moral, religious or social nature e.g., a promise to lunch together at a

friend's house or to take a walk together are not contracts because they are not likely to
create a duty enforceable by law for the simple reason that the parties never intended that
they should be attended by legal consequences.

Essential Elements of a Valid Contract

1. Agreement – There should be a meeting of minds of the parties. (Consensus ad

idem.)
2. Free Consent – Parties Consent should be free from coercion, undue influence,
misrepresentation, fraud or mistake.
 3. Contractual Capacity – Parties should have legal competence to enter into an
agreement. For instance, They must have attained the age of majority, should be
of sound mind. A contract entered between the parties who do not possess the
legal capacity is null in the eyes of Law.
4. Lawful Consideration – An agreement not supported by consideration becomes a
nudum pactum. (Naked agreement)
5. Lawful object – The purpose of the agreement must be lawful. It should not be
forbidden by law, fraudulent, Should not cause injury to a person or property,
should not be immoral or against public policy.
6. Not expressly declared void – The Act has declared certain types of agreements as
void. Eg: Agreements in restraint of marriage, trade or legal proceedings.
7. Possibility of Performance – Agreement should be capable of being performed.
8. Certainty of Terms – Agreement should be certain and it should not contain any
vague terms.
9. Intention to create legal obligations – Though Section 10 is silent on this, English
Law considers this as an important ingredient of a contract. An agreement
creating social obligations cannot be enforced.
10. Legal formalities – Agreements made in India may be oral or written. However
section 10 of the Act specifically states that where a statute requires it should be
in writing or should be witnessed or registered, such formalities should be
observed. Otherwise it cannot be enforced.2

From the foregoing analysis it can be concluded that all contracts are agreements but
all agreements cannot be treated as contracts.

2
For instance, the Indian Companies Act requires the Memorandum and Articles of Association to be
registered.
2. ‘Not all persons have the capacity to enter into a contract.’ Discuss this
statement.