We need to know what is a contract and what is an agreement, before knowing this we need to know what is proposal/offer, promise, acceptance, lawful consideration, free consent, and competence to contract. We must keep in our mind that the object of the contract must be lawful and legal; If the object of an agreement is illegal then that agreement is a void agreement.
According to section 2(a) of The Indian Contract Act 1872 “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
Section 2(b) says, “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”.
When the proposal is accepted it becomes a promise.
Consideration must be lawful. Lawful Consideration is sine-qua-non factor for every contract. “No consideration no contract” means every legal contract needs a lawful consideration, without any lawful consideration there is no contract but the exception is always there. Section 25 of The Indian Contract Act 1872 is the exception to this statement.
According to section 2(d) of this act “When, at the desire of the promisor, the promisee 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”.
Competent to contract:
For making any contract minimum of two persons are required and both the parties must be competent to contract as per sections 11 and 12 of The Indian Contract Act 1872.
According to section 11 of The Indian Contract Act 1872 “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.”
According to section 12 of The Indian Contract Act 1872 “A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind”.
When the parties are entering into a contract there must be free consent between them. Free consent is mandatory and essential for every contract. When two or more persons are said to consent when they agree upon the same thing in the same sense (section 13 of The Indian Contract Act 1872). And according to section 14 of The Indian Contract Act 1872 “consent is said to be free when it is not caused by-
- Coercion, as defined in section 15, or
- Undue influence, as defined in section 16, or
- Fraud, as defined in section 17, or
- Misrepresentation, as defined in section 18, or
- Mistake, subject to the provision of sections 20, 21, and 22.
Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake”.
For valid contract parties, consent must be free. When there is no “consensus ad idem” (same thing in the same sense) there is no valid contract.
What is a contract?
According to section 2(h) of The Indian Contract Act 1872 “An agreement enforceable by law is a contract”. It means those agreements are enforceable by law they are contracts others not. For example, an agreement to sell a bike may be a contract, but an agreement to go to the movie may be a mere agreement not enforceable by law. To go to a movie is a social agreement and social agreements are not enforceable by law.
What is an agreement?
According to 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”. We can understand this definition by an example, A promises to deliver his book to B, and in return, B promises to pay 1,000 to A. There is said to be an agreement between A and B.
“All contracts are agreement”
We know that when an agreement enforceable by law is a contract. A contract is an agreement that is enforceable by law. It is an agreement or set of promises giving rise to obligations that can be enforced or are recognized by law. In order to become an agreement into a contract, it has to satisfy all the essentials of a valid contract as mentioned in section 10 of the Indian Contract Act 1872.
Section 10 of this act says, “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”.
The essentials of a valid contract:
- There must be two parties.
- The agreement should be between the parties who are competent to contract.
- There should be a lawful consideration.
- The object of the agreement must be lawful.
- There should be free consent between the parties.
- The agreement must not be one that has been expressly declared to be void.
“All agreements are not contracts”
An agreement is a set of promises. Section 2(e) of The Indian Contract Act 1872 says, “Every promise and every set of promises, forming the consideration for each other, is an agreement”. In an agreement, there is a promise between both parties. For example, A promises to deliver his book to B, and in return of B promises to pay Rs. 1,000 to A. there is said to be an agreement between A and B. After acceptance of the offer/proposal it becomes a promise, promise is the result of offer acceptance.
Thus, when there is a proposal/offer from the proposer and the acceptance of that proposal by the propose it results in a promise. Promise and reciprocal promise from promisor and promisee form an agreement.
Hence, we can conclude only commercial agreements where parties are intending to shoulder responsibility upon each other and when they are entering into an agreement keeping in mind that in case of breach of agreement terms by one of the parties, the aggrieved party may go to court against the party who breaches the terms and compel him by the process of law to pay compensation as decided.