Difference between Contracts and Agreements and, the essentials of a valid contract
Updated: Feb 12, 2022
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?
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 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.
3. There should be a lawful consideration and a lawful object in respect of that agreement:
Consideration is an integral part of a contract and therefore, it is defined in the Act under Section 2(d) which provides that-
“when at the desire of the promisor, promise or any other person has done or abstained from doing or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence, or promise is called a consideration for the promise”
Section 23 of the Act the conditions needed to constitute an object or consideration as “lawful”-
It is not specifically forbidden by law.
Is fraudulent
Is not of such a nature that defeats the purpose of the law.
Does not result in an injury to any person or property.
It is not regarded by the court as immoral.
It is not opposed to public policy.
4. The consent/acceptance must be free:
As per Section 14 of the Act, consent is said to be free when it is not caused by:
(i) Coercion.
According to Section 15, “Coercion is the committing, threatening to commit any act forbidden by the Indian Penal Code”
OR
Unlawful detaining or threatening to detain any property to the prejudice of any person to compel the other to agree.
In Chikkam Amiraju vs Chikkam Seshamma,
The husband threatened to commit suicide to compel his wife and child to provide their consent to give away the property to his brother. The Court held this agreement of consent to be void as it wronged the provision u/s 15 of the Indian Contract Act, 1872.
(ii) Undue Influence
Section 16 defines undue influence – A contract is said to be induced by undue influence where the relations subsiding between two parties is such that one holds a dominating position over the other to influence their will. Thus, the presence of two essentials need to prove undue influence:
a) Position of dominance.
b) Use of such position to commit the aforementioned act.
In the following cases, a person is deemed to be in a position to dominate the will of the other:
i) When he holds an apparent authority over the other.
ii) Where he stands in a fiduciary relationship with the other party.
iii) Where he makes a contract with a person suffering from mental illness temporarily or permanently or affect permanently because of age, illness or bodily distress.
(iii) Fraud
Section 17 defines Fraud as it means and includes any of the following acts committed by a party to contract or by an agent to induce the consent of the other:
i) Suggestion as to fact, which is not true and the person knows it to be untrue.
ii) Active concealment of facts.
iii) Any other act fitted to deceive.
iv) Any act or omission law deems that the law deems to be fraudulent.
#Mere silence is not a fraud
To constitute fraud, there must be active concealment of facts that are or were demanded off by the other party. Thus, this type of contract is voidable.
#Duty to Speak ( Contracts Uberima Fides)
When the circumstances are such that the person must keep silent, to speak then, keeping silence amounts to fraud.
Contracts Uberima Fides mean – Contracts of utmost faith and, in this, the parties must make full disclosure of every fact related to the contract.
In-State of Andhra Pradesh v T. Suryachandra Rao
The defendant had ceded a certain piece of land to the state government for which he received certain compensation from them. But, upon investigation, it was found that the concerned land was already acquired under the Land Acquisition Act of 1898.
The Apex Court thus held up two components of Fraud- Deceit, and Injury. The injury does not necessarily mean economic loss but deprivation of property whether movable or immovable.
(iv) Misrepresentation.
Section 18- The person making the statement is innocent as he makes the statement without any intention to deceive the other party. The statement is false although, the person believes it to be true.
In Derry v Peek
The directors of a company stated in their prospectus of the company that they had been authorized to run tramways with steam power. Sanction from the Board of Trade had yet to be obtained but it was believed that the same would be obtained as a matter of due course. The Board of Trade refused to permit them to use steam power. In an action by a shareholder, the Court held that there was misrepresentation but not a fraud. Fraud is proved when it can be shown that a representation has been made –
a) Knowingly
b) Without belief in the truth.
c) Recklessly, carelessly whether true or not.
(v) Mistake.
Sections 20, 21, and 22- Mistake can be in two ways:
a) Mistake of law:
Ignorance or mistake regarding foreign laws is excusable but not when it comes to Indian Laws. This means either party cannot simply claim it was unaware of the law. the parties are not expected to know foreign legal provisions and their meaning. So a mistake of foreign law is treated as a mistake of fact under the Indian Contract Act, 1872.
b) Mistake of fact:
This is when both the parties misunderstand each other leaving them at a crossroads. Such a mistake can be because of an error in understanding, or ignorance or omission, etc. But a mistake is never intentional, it is an innocent overlooking.
The Raffles v. Wischelhaus case is an excellent source for this section.
5. The agreement must not be expressly declared to be void:
An agreement to do an illegal act or infringe another’s legal right- are some examples of agreements that are void or are voidable.
Therefore, Every contract must be consistent with all the aforementioned conditions for it to be enforceable in a court of law.
So, Always, have a good look before you sign anything!
Hope this, helps. Check out our other posts below :)