You call it an agreement, they name it a contract, but what is the deviation? Aren’t they synonymous? This is what most of us think when we generally talk about signing an employment agreement, a rent agreement, or a business contract. What we do not realize is that there is a thin line of difference between agreement and contract which makes a huge variation in the context and enforceability. One should note that agreements and contracts can be regarded as the two sides of a coin. When agreement becomes contract, it gets the ability to be enforced in the Court of Law. And when an agreement is against the law, it loses any abiding effect, and may even attract punishment under criminal laws. So here, we are seeking to understand this line of difference between agreements and contracts as per the Indian Contract Act, 1872.
What is the difference between contract and agreement?
While agreements are often used synonymously with contracts, they are not just the same. There is a huge line of difference between agreement and contract when speaking legally.
Understanding Agreements
What we may generally believe is two people acknowledging the same set of terms constituting an agreement. However, what the Contract Law states is specific and needs to be taken note of here. Section 2(e) of the Indian Contract Act, 1872 states that “Every promise and every set of promises, forming the consideration for each other, is an agreement”. It reflects that if there is a consideration accompanied along with the offer and acceptance, it becomes an agreement. It may be noted that one person offering cannabis to the other if he paid Rs 10,000 per unit (Totally clueless on the actual or relatable cost), there is offer, acceptance and consideration as well, thus, it becomes an agreement as per the checks. Another example can be that of a hand-painted jar being replaced with cannabis in the previous example. The two examples used here shall be used to explain the difference between agreement and contract.
Understanding Contracts
Section 2(h) of the Indian Contract Act lays that “An agreement enforceable by law is a contract”. In other words, any agreement which is not against the law but in accordance with it is a contract. For the two examples given above to explain what constitutes an agreement, let’s connect the dots pertaining to the difference between contract and agreement. The first example included exchange of cannabis for money, which is against the law. Hence, no agreement becomes contract in that case. On the other hand, if there was a hand-painted jar instead of cannabis, even for the same price, it is not illegal but enforceable by law, and thus, agreement becomes a contract.
When agreement becomes contract?
While it has been addressed before, the transformation comes with the legal enforceability. Any agreement whose object is illegal cannot become a contract. On the other hand, any agreement which is legally acceptable and possible to be practically performed becomes a contract to be enforced through the applicable laws.
Difference between Agreement and Contract in Tabular Form
| Particulars | Agreement | Contract |
| Definition | Every promise and every set of promises, forming the consideration for each other, is an agreement. | An agreement enforceable by law is a contract |
| Contract Act Provision | Section 2(e) | Section 2(h) |
| Requirements | Offer+Acceptance+Consideration | Compliance with all 10 essentials of valid contract |
| Intention to create legal relations | Not usually | Always |
| Enforceability | Not always legally binding | Legally enforceable/binding |
| Disputes | Disputes pertaining to an agreement not enforceable by law may be resolved through negotiation or mediation. | Disputes pertaining to a contract may be resolved through litigation, arbitration, or any other mode of alternative dispute resolution as the law allows. |
Closure
We have explained this way before, but this is the most easy and relatable way to understand the connection between agreement and contract. They say all squares are rectangles, but all rectangles are not squares. That’s because in square, all 4 sides are equal, which is not the case in rectangles. The identity for rectangles is that they have opposite sides of equal length. So, in a square, since all 4 sides are equal, the criteria for opposite sides being equal for a rectangle is already complied with. That’s why all squares can be regarded as rectangles, making it a wider category allowing inclusion of rectangles as well. For agreements to be contracts, it is a must to be enforceable by law. On the other hand, contracts are agreements enforceable by law, already complying with the requirements of an agreement in Contract Law.
