Difference between Contracts and Agreements and, the essentials of a valid contract

Updated: Sep 13, 2021

Before we dive into the intricacies that must be satisfied for a contract to be valid, it is important to understand the core difference between an agreement and a contract.

What is an agreement?

Two people shaking hands in agreement

An agreement is a form of cross-reference between two different parties, which may be written, oral and it ultimately lies upon the honour of the parties to fulfil the said promise.

As per Section 2(e) of the Indian Contract Act, 1872:

"Every promise and every set of promises, forming the consideration for each other is an agreement."

An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and the other party signifies its assent thereto.

As per Section 10 of the Indian Contract Act, 1872, an agreement to become a contract must give rise to a legal obligation. If an agreement is incapable of creating a duty enforceable by law, it's not a contract.

What is a contract?

A person signing a contract

A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. There must be an offer and acceptance for a contract to be formed. An offer must be backed by acceptance for which there must be a consideration.

According to Section 2(h) of the Act,

"An agreement enforceable by law is a contract."

Thus, a contract always has two essential elements:-

1. An agreement.

2. Legal obligation i.e. duty enforceable by law.

Illustration- A School enters into a negotiation with an event management team for organizing its annual fest. The team agrees to the proposal at a decided amount and, signs a document declaring their affirmation to the offer put forward by the school. Thus, a contract is made.

An agreement is a much broader concept than a contract as it does not need to satisfy the conditions or the essentials (as in Section 10 of the Indian Contract Act, 1872).

So, what are these essential conditions that make an agreement, a contract, and therefore, legally enforceable by the parties involved? Find the detailed explanation, below.

The essentials of a valid contract under the Indian Contract Act, 1872:

These essentials are laid down under Section 10 of the Indian Contract Act, 1872 (hereafter referred to as “the act”) which provides that,

All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”

Don't worry, I'll elaborate on this :)

1. There is an agreement between the two parties:

This is based on the maxim- ‘consensus ad idem i.e. meeting of minds of all parties involved. This also means that an offer or proposal [Section 2(a)] has been communicated and the same has been accepted [Section 2(b)] by the other party thereby, signifying the aforementioned meeting of minds in the transaction.

2. The agreement is between parties who are competent to contract:

Competency to contract is provided under Section 11 of the Act:

“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject

Thus, the following three categories of persons are not competent to contract:

i. A person who has not attained the age of majority i.e. a minor. (Refer to the case of Mohori Bibee v. Dharmodas Ghose)

ii. A person who is of an unsound mind.

iii. A person who has been disqualified from contracting by the law.