National Academy of Customs

National Academy of Customs, Indirect Taxes & Narcotics
Module 01: All agreements are not Contract – Comment
Submitted To: National Law School of India University, Bangalore
Submitted by:
Roll No: 01
TOC o “1-3” h z u Cases Referred PAGEREF _Toc528767548 h 2Introduction PAGEREF _Toc528767549 h 4Agreement PAGEREF _Toc528767550 h 4Examples of Agreement PAGEREF _Toc528767551 h 4Contract PAGEREF _Toc528767552 h 5What makes an “Agreement” a “Contract” PAGEREF _Toc528767553 h 5Capacity / Competency of the parties PAGEREF _Toc528767554 h 6Free mind / free consent of the parties PAGEREF _Toc528767555 h 7Legally not harmful or “Lawful Object” PAGEREF _Toc528767556 h 7Not prohibited by any law PAGEREF _Toc528767557 h 7There should be a Valid Consideration PAGEREF _Toc528767558 h 8There should be Certainty PAGEREF _Toc528767559 h 8Agreement vs Contract PAGEREF _Toc528767560 h 8Conclusion PAGEREF _Toc528767561 h 9
Cases Referred
Mohammad Yasin v. Town Area Committee
Union of India v/s R.C.Jain
Calcutta State Transport Corporation vs. Commissioner of Income-tax, West Bengal.
Premji Bhai Panwar vs. Delhi Development Authority (DDA)
Housing Board of Haryana v. Haryana Housing Board Employees Union
M/S Andhra Pradesh Housing Board v. Department of IT
IntroductionIn the globalised world with economic growth becoming an important aspect of development of nation and individuals. In this scenario Contracts and Agreements become important. The contracts provide many benefits. It helps in getting paid, solving disputes and protecting the intellectual property rights. By limiting the liability and creating certainty it provides for building trust in the present business scenario. Also in general sense it makes way for good customer service. Hence we see that Contracts and Agreements becomes very important in this perpetually changing world and it becomes important to understand them and the differences between them.
In simple terms we can say that an agreement is a kind of proposal and once this proposal is accepted by two parties or entities then they promise to do or abstain from doing a particular act.
So it can be understood that it is basically a mutual understanding between two or more legal entities. Here the entities promise about their duties related to their future acts, abstinence from an act, performance or any consideration.

Generally, an agreement may become a contract but there can be cases where the agreement is not legally binding or may be related just to other activities like sale and transfer of property. Agreement may be written or oral and its fulfilment depends upon whether the entities or parties keep up their honour.

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The Indian Contract Act, 1872 in Section 2(e) defines an “Agreement” as – “Every promise and every set of promises, forming the consideration for each other, is an agreement”
Examples of AgreementThere are Collective Bargaining Agreements between employer and employee representative like union related to conditions of employment such as wages, working hours, maternity benefits and overtime.

Similarly, there are Divorce Agreements which are related to custody of children, support provided to the wife and how the existing property can be divided between the parties.

In case of Simple agreements there is no legal binding but many a times based of few evidences and trust between the parties like distribution of agricultural sale proceeds between siblings.

ContractContract is defined in The Indian Contract Act, 1872. Under Section 2(h) “Contract” is defined as -” An agreement enforceable by law is a contract””
On analysis of the definition we observe two basic elements in a contract:
There is an Agreement between two parties
There is a Legal Enforceability clause attached to that agreement
So we understand from here that a “Contract” will be an agreement but until that agreement is backed and enforceable by law it does not become a contract.
Contract: An adult agrees to sell the land he/she owns to another person.

Not a Contract: A minor agrees to sell the house he/she inherited from his father after his death.

What makes an “Agreement” a “Contract”
We have already seen that what agreement and contract mean and how they are defined in The Indian Contract Act, 1872. Now we should see what actually makes an agreement a contract:
Section 10 of the Indian Contract Act, 1872mentions some of the critical elements of a “Contract”.
Section 10: “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”
Thus with the help of above description of a contract we can point out important elements which makes an agreement, a contract:
Capacity / Competency of the parties;
Free mind / free consent of the parties;
Legally not harmful or “Lawful Object”;
Not prohibited by any law;
There should be a Valid Consideration;
There should be Certainty.

Capacity / Competency of the parties The capacity of parties can be checked in Section 11 of the Indian Contract Act,1872 which brings into light the competent person or entity who can be a part of the contract
Section 11: “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”
Hence here we see that a person who is not a minor, who is not mentally disordered and not disqualified under any law. It also restricts public authorities, government officials and corporations from getting into contracts in many cases.
There are different objectives behind it. In case of mentally disordered persons and minors their interests needs to be protected as they may not understand the implications of the contract and take a rational decision. In case of public servants and government officials it is important to protect the public finance and tax payers’ money. It will help in bringing down corruption. In case of corporations the protection of investors’/ creditors ‘money becomes important. Thus we see the capacity of parties becomes very important.

Free mind / free consent of the partiesThere should be consent of all the parties. It means that the parties must have understood the contract in the same sense and would have agreed upon it. The consent points towards absence of any kind of pressure or misunderstanding.

Section 14 of the Indian Contract Act, 1872 explains that consent should be free from any kind of coercion, undue influence, fraud, misrepresentation and mistake.
Coercion is mentioned under Section 15 where it describes that any pressure due to committing or threating to commit any act not allowed under the Indian Penal Code, 1860. It also mentions pressure due to unlawfully detaining any property may affect free consent of the party.

In the Section 16 we find the concept behind the “Undue Influence” where one of the legal entity / party has the position to dominate the decision of the other party. It can be due to one party having authority over other party or one of the party’s mental capacity is permanently / temporarily affected by age, illness etc.

Under Section 20 “Mistake” is described where both the parties in the contract are under mistake as to a matter of fact which is necessary to the contract. The “mistake” can be of the nature – identity of the party, subject matter or nature of the promise.

Legally not harmful or “Lawful Object”This case arises if the contract is forbidden by law or defeats the provision of any law. Again if it causes harm to a person or to his/her property will not be a lawful object. The contract will be void if the court decides that it is against the public policy is immoral to the society.

In a simple example we can understand that if there is contract related to sale of banned drugs and psychotropic substance the contract will be considered unlawful.

Not prohibited by any lawIf there is any prohibition related to the existing law, then that contract will be considered void as the basic element for an agreement to be a contract is its legal enforceability. There are agreements which are expressly declared void under the Indian Contract Act, 1872. Few examples related to this are – agreement in restraint of marriage, agreement in restraint of trade, agreement without consideration, agreement in restraint of legal proceedings etc.

There should be a Valid ConsiderationConsideration means anything which has a value under the existing law. It is generally the price paid by one party to the other in accordance with the contract. Consideration can be an act or forbearance from an act. It can also be a promise of doing or not doing something. Such contracts without a consideration would be considered void.

There should be CertaintySection 29 of the Indian Contracts Act,1872 mentions that uncertain contracts will be considered void. Here for a contract to be valid the meaning of the contract could be ascertained and it should not be vague. For example, if in a contract A agrees to sell B 50 tonnes of iron at the rate 100 rupees per tonne then that contract will be considered void as type or grade of iron not mentioned here.
Agreement vs Contract
The above discussion explains we understand that how contracts differ from agreements. The agreement will have an offer and an acceptance between the parties but when it has the elements necessary for being a contract under the law like legal enforceability, a valid consideration etc. as discussed above it becomes a contract.

So in a simple example we can understand that if A Invites B for a dinner and B promises to come. This is an agreement and if B doesn’t come then A cannot sue B as the legal backing is not there and this is not a contract. Similarly, if in the above case A agrees to sell B a car of a particular model for rupees one lakh and both the parties agrees the terms then it is a contract as the legal backing and other elements of the contract is present here.

ConclusionAn agreement just has the basic requirement of promise and acceptance but in absence of any legal backing it has no legal remedy. However, when this agreement passes though the channels of legal enforceability it becomes a contract. Also the contract has other characteristics like a valid consideration, free consent etc. As legal remedy is present in case of contracts, they become very important for business and economic development of a nation. The discussion above points in the direction how the “Contracts” are structured on the basis of “Agreements”. Thus we can conclude on that basis that all contracts are agreements but not all agreements are contracts.