Difference Between Contract and Agreement Under the Indian Contract Act

Introduction

Understanding the difference between a contract and an agreement is crucial in the legal and business world. These two terms are often used interchangeably, but they carry distinct meanings under the Indian Contract Law, 1872. While every contract is an agreement, not every agreement qualifies as a contract. This article simplifies the legal difference and highlights how the Act governs them.

What Is an Agreement?

According to Section 2(e) of the Indian Contract Act, an agreement is “every promise and every set of promises, forming the consideration for each other.” In simple terms, an agreement happens when two or more parties agree upon something with mutual understanding.

For example, if A promises to sell his car to B for ₹1 lakh, and B agrees, it becomes an agreement. However, without legal enforceability, this agreement remains informal.

What Is a Contract?

Under Section 2(h) of the Indian Contract Act, a contract is defined as “an agreement enforceable by law.” This means that a contract is a legally binding agreement that the courts can enforce. For an agreement to become a contract, it must meet several conditions, including:

• Free consent of the parties
• Lawful consideration
• Lawful object
• Capacity of parties
• Not expressly declared void

If any of these elements are missing, the agreement cannot become a valid contract.

Differences Between Agreement and Contract

1. An agreement is not legally enforceable on its own, while a contract is enforceable by law.
2. All contracts are agreements, but not all agreements are contracts. For example, a social agreement (like a dinner plan) is not a contract.
3. Agreements may lack legal requirements like consideration or lawful object. A contract must fulfill all legal conditions under the Act.
4. Contracts are binding and have legal consequences. Agreements without legal backing are not binding.

Illustration Under the Act

Let’s say A agrees to give B ₹10,000 as a gift. This is a mutual understanding and thus an agreement. But it lacks consideration and is not legally enforceable. Hence, it is not a contract. However, if A agrees to sell his bike to B for ₹10,000 and B accepts, it meets the contract requirements under the Act and becomes enforceable.

Conclusion

To summarize, the Indian Contract Act, 1872 draws a clear line between agreements and contracts. An agreement is simply a mutual understanding, while a contract is a legally enforceable agreement. For an agreement to become a contract, it must satisfy the conditions laid down in the Act. Understanding this distinction is vital for entering into binding legal obligations and avoiding disputes.