Difference Between Agreement And Contract In India

Submitted by asandil on 5/11/2024

In India, the terms “agreement” and “contract” are often used interchangeably in everyday conversations, leading to potential confusion in legal contexts where precise terminology matters. While colloquially similar, legally they represent distinct concepts, especially when distinguishing between an agreement and a contract. An agreement refers broadly to any mutual understanding or arrangement between parties, regardless of enforceability, whereas a contract is a subset of agreements, meeting specific legal criteria and enforceable by law. Understanding these nuances is crucial as agreements and contracts regulate various transactions and relationships in Indian society. Notably, contracts, unlike agreements, require specific legal elements such as offer, acceptance, consideration, and intention to create legal relations for enforceability. Recognizing these differences is vital for legal compliance, risk management, and ensuring clarity in transactions, important for adhering to contract law. Ultimately, clarity promotes fairness and efficiency, enhancing confidence in the Indian legal system’s ability to uphold contractual rights and obligations, reinforcing the concept that a contract is a legally binding agreement.

Agreement vs. Contract: Definitions and Overview

Agreement:

An agreement is a broader term that refers to a mutual understanding or arrangement between two or more parties regarding their rights and obligations in relation to a particular subject matter. It involves a meeting of minds or consensus between the parties involved. Agreements can be oral or in writing, explicit or implied, and may or may not be legally enforceable. In Indian law, agreements are governed primarily by the Indian Contract Act, 1872. Contracts, on the other hand, are a specific type of agreement that creates legally binding obligations between the parties involved. A contract is a formal, written agreement that outlines the terms and conditions of the agreement, including the rights and responsibilities of each party. In order for a contract to be legally enforceable, it must meet certain legal requirements, such as offer and acceptance, consideration, legality of purpose, capacity of the parties, and certainty of terms. In summary, while all contracts are agreements, not all agreements are contracts. Agreements can be informal and may or may not be legally enforceable, whereas contracts are formal and legally binding agreements that create obligations between the parties. 

Contract

A contract, on the other hand, is a specific type of agreement that meets certain legal requirements, resulting in enforceability by law. It is essentially a formalized agreement that creates legally binding obligations between the parties involved. For a contract to be valid, it must fulfill certain essential elements, such as offer, acceptance, intention to create legal relations, lawful consideration, competency of parties, and lawful object, which distinguish a legitimate binding agreement from a simple agreement. Contracts can be written or oral, but certain types of contracts are required to be in writing to be enforceable under Indian law. In India, contracts are governed by the Indian Contract Act, 1872, which defines the rules and regulations surrounding contract formation and enforcement. This act also outlines various types of contracts, such as contracts of sale, contracts of bailment, contracts of agency, and more. Contracts can range from simple agreements between individuals to complex contracts involving multiple parties and detailed terms and conditions. Some common examples of contracts include employment contracts, rental agreements, sales contracts, and service agreements. In the event of a breach of contract, the non-breaching party may seek remedies such as damages, specific performance, or cancellation of the contract. It is important for parties entering into a contract to clearly outline their rights and obligations to avoid any misunderstandings or disputes down the line. Overall, contracts play a crucial role in enabling parties to formalize their agreements and conduct business in a legally binding manner. By understanding the essential elements of a contract and adhering to the legal requirements, individuals and businesses can protect their rights and interests in various transactions. 

Key Differences Between Agreement and Contract

1. Enforceability:

  • An agreement may or may not be legally enforceable, depending on various factors such as the intention of the parties, the presence of essential elements, and compliance with legal formalities.
  • A contract, by its nature, is legally enforceable. It creates legally binding obligations on the parties involved, and failure to fulfill these obligations can lead to legal remedies or consequences.

2. Formal Requirements:

  • Agreements can be oral or written, and they may even be implied from the conduct of the parties.
  • Certain types of contracts, especially those dealing with real estate, sale of goods, and agreements that are required by law to be in writing, must be executed in writing to be enforceable.
  • While agreements can be social or domestic in nature and may lack the intention to create legal relations, contracts require such intent, highlighting the distinction between an agreement and a contract. Parties entering into a contract must intend to be legally bound by its terms.

4. Consideration:

  • Consideration refers to something of value exchanged between the parties to a contract, forming the basis for the bargain. It is an essential element of a contract but may not be necessary for all types of agreements.

5. Competency of Parties:

  • For a contract to be valid, the parties must be competent to enter into a contract, which ties back to ensuring all elements of a valid contract are met. This means they must be of sound mind, of legal age, and not disqualified by law from entering into contracts.
  • Agreements involving incompetent parties, such as minors or persons of unsound mind, may still be enforceable to some extent under certain circumstances, but contracts with such parties are generally voidable.
  • Certain contracts are required by law to be executed in a specific manner or contain certain formalities. For example, contracts for the sale of immovable property must be in writing and registered, as per the provisions of the Indian Registration Act, 1908, indicating the importance of a written contract.

The Indian Contract Act, 1872, is the primary legislation governing contracts and agreements in India. It lays down the general principles relating to contracts and provides a framework for the formation, performance, and enforcement of contracts. Some of the key provisions of the Act relevant to agreements and contracts include:

1.Definition of Contract (Section 2(h)):

  • The Act defines a contract as an agreement enforceable by law. This definition highlights the essential aspect of enforceability, distinguishing contracts from mere agreements, and underscores the difference between an agreement and a contract.

2. Essential Elements of a Contract (Sections 10-30):

  • The Act outlines the essential elements required for the formation of a valid contract, including offer, acceptance, consideration, intention to create legal relations, competency of parties, lawful object, and lawful consideration.

3. Types of Contracts (Sections 2(e) and 2(g)):

  • The Act recognizes various types of contracts, including contracts of sale, contracts of indemnity, contracts of guarantee, contracts of bailment, contracts of pledge, and contracts of agency, among others. Each type of contract may have its own specific requirements and implications.

4. Void and Voidable Contracts (Sections 2(j) and 2(i)):

  • The Act distinguishes between void contracts and voidable contracts, embodying the difference between an agreement that cannot become a contract and one that can be invalidated. A void contract is one that lacks essential elements from the beginning and has no legal effect, while a voidable contract is initially valid but may be set aside by one of the parties due to certain defects or vitiating factors, such as coercion, fraud, undue influence, or mistake.

5. Performance and Discharge of Contracts (Sections 37-67A):

  • The Act deals with the performance and discharge of contracts, including rules regarding tender of performance, performance of reciprocal promises, discharge by breach, frustration of contracts, and remedies for breach of contract.

6. Remedies for Breach of Contract (Sections 73-75):

  • In case of breach of contract, the innocent party is entitled to certain remedies under the law, such as damages, specific performance, injunction, or quantum meruit, depending on the nature of the breach and the circumstances of the case.

## Practical Implications and Examples To illustrate the practical implications of the difference between agreements and contracts in India, consider the following scenarios:

1. Sale of Goods:

  • Suppose A orally agrees to sell a car to B for a certain price. This oral agreement constitutes an agreement between A and B. However, if A later refuses to sell the car or sells it to someone else, B may not have legal recourse against A because the agreement is not enforceable due to its oral nature, underscoring the importance of a written contract.
  • Conversely, if A and B enter into a written agreement for the sale of the car, signed by both parties and containing all essential terms such as the description of the car, price, and terms of payment, it constitutes a valid contract. If A fails to deliver the car as per the contract, B can seek legal remedies for breach of contract.

2. Employment Agreements:

  • An employer may offer a job to a prospective employee, outlining the terms and conditions of employment. If the prospective employee accepts the offer, an agreement is formed. However, if the agreement lacks certain essential elements or is not intended to be legally binding, it may not be enforceable.
  • To create a legally binding employment contract, the offer, acceptance, consideration (such as salary or benefits), and intention to create legal relations must be present. Moreover, certain terms and conditions of employment, such as notice period, non-compete clauses, and confidentiality obligations, are typically included in a written employment contract to ensure clarity and enforceability.

3. Real Estate Transactions:

In the context of real estate transactions, agreements for the sale of immovable property must be in writing and registered, as per the requirements of the Indian Registration Act, 1908, to become a contract. An agreement to sell a property that does not comply with these legal formalities may not be enforceable, highlighting the difference between a mere agreement and a contract.

  • Once the parties enter into a written agreement for the sale of immovable property and fulfill all legal requirements, including payment of stamp duty and registration fees, the agreement becomes a legally binding contract. Failure to perform obligations under the contract, such as delivering possession of the property or paying the purchase price, can result in legal consequences, illustrating how a contract is a legally binding agreement.

4. Loan Agreements:

Suppose A agrees to lend money to B on mutually agreed terms. If this agreement is oral or lacks specific terms, it may be considered an agreement but not necessarily a contract. However, if A and B enter into a written loan agreement specifying the principal amount, interest rate, repayment terms, and any collateral or guarantees, it constitutes a legally binding contract. In case of default by B, A can enforce the terms of the contract and seek remedies such as repayment of the loan amount with interest.

5. Service Agreements:

Consider a scenario where A hires B, a freelance graphic designer, to create a logo for A’s business. They might enter into a non-disclosure agreement to protect the confidentiality of the work. If the parties agree on the scope of work, timeline, and compensation orally or through email communication, it forms an agreement. However, to ensure enforceability and clarity, it’s advisable for A and B to enter into a written service agreement detailing the project specifications, deliverables, payment terms, and any intellectual property rights. This written contract protects both parties’ interests and provides recourse in case of disputes or non-performance.

6. Partnership Agreements:

Imagine A and B decide to start a business together and agree on the terms of their partnership, including profit-sharing, management responsibilities, and exit provisions. This agreement between two parties formulates the foundation of their business arrangement. While a verbal understanding may establish the basis of their partnership, it’s essential for A and B to formalize their agreement through a written partnership deed. This document outlines the rights and obligations of each partner, the nature of the business, capital contributions, profit distribution, and dispute resolution mechanisms, ensuring clarity and minimizing future conflicts.

7. Lease Agreements:

Suppose A owns a commercial property and agrees to lease it to B for a specified term and rent. While an oral agreement or handshake may establish the initial understanding between A and B, it’s advisable for them to enter into a written lease agreement. This written contract defines the terms of the lease, including rent amount, duration, renewal options, maintenance responsibilities, and termination clauses. In case of disputes over rent payments, property maintenance, or lease terms, the written lease agreement serves as a legal document for resolving conflicts.

8. Construction Contracts:

Consider a situation where A hires B, a construction contractor, to build a house according to certain specifications and within a specified budget and timeframe. They will likely enter into an agreement that might be brought before a court of law if disputes arise. While initial discussions and agreements may occur verbally, it’s essential for A and B to formalize their arrangement through a written construction contract. This contract details the scope of work, materials to be used, payment schedule, penalties for delays, warranties, and dispute resolution mechanisms. By having a written contract, both parties have clarity on their respective obligations and recourse in case of issues during the construction process.

Conclusion

In India, while agreements and contracts are often used interchangeably, they carry distinct legal implications. An agreement denotes a broader understanding or arrangement between parties, encompassing both formal and informal agreements, whereas a contract is a specific subset of agreements that meets legal requirements, rendering it enforceable by law. Familiarity with the essential elements of a contract, as delineated in the Indian Contract Act, 1872, is imperative for parties entering into transactions or relationships involving agreements or contracts. Moreover, adherence to legal formalities and documentation requirements is essential to ensure the enforceability and validity of contracts under Indian law. By understanding these distinctions and complying with legal principles, parties can safeguard their rights and interests while mitigating the risks associated with contractual relationships. This includes ensuring clarity in contractual terms, specifying rights and obligations, and establishing mechanisms for dispute resolution. Ultimately, a comprehensive understanding of agreements and contracts facilitates transparency, fairness, and confidence in contractual dealings within the Indian legal framework, enhancing the integrity of business and personal relationships alike.