contract or agreement


In company law, there is interchangeable use of term contract and agreement. Though, they does not refer to same things. There is another term arrangement which also relevant in this context but not relevant to present post, here.

Agreement is an action of being agree. A contract is more than that.

“All contracts are agreements but all agreements are not contract.”

We shall understand it in legal manner in layman terms.

As I said, agreement is an act of being agree. One may agree with someone else on a particular action, reaction, thought, plan, conspiracy, etc. You can agree to help, to date, to marry with someone, to kill someone else, to purchase from someone something, to sale something, to hire a service, to provide a service, to have drink, to hear his story, to hear his pain and so may such daily acts. All are your agreement linguistically. when you agree with someone, you made a promise – like to do help or to take help.

However, in all above mentioned action of being agree with someone, we usually do not call all as agreement as practice. In practice, we call an action agreement when we made a formal thinking on it. Likewise, in above examples to drink together, to date, to talk etc. may not be consider as agreement. But, to kill someone, to marry, to purchase, to sale, to hire are some examples of formal agreements.

Interesting, some of these agreement has their special names – conspiracy, crime, marriage, and contract.

When we agree after proper thinking by use of considered mind, we come to a formal agreement or understanding. To write down an agreement is no necessity but for our own record. Sometime we have some memorandum of understanding in writing. So an agreement may be in writing or oral.

You give a coin to a beggar for his smile or best wishes is actually an agreement. When you hire a pedal rickshaw even without asking for money payable you do an agreement. But first agreement is only agreement while second become a contract.

Journey of an agreement to become a contract complete when it become legally enforceable. Section 10 of the Contract Act, 1872.

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.

Some agreement could not be contract because law does not permit – like to sell alcohol to minor.

Some agreements are contracts. A contract is an agreement with an intention to (even implied intention) enforce consideration or promise done by other party, in case other party fails to perform its part of promise. Like, you or rickshaw puller never have primary intention to go to court against each other to enforce other’s promise – both parties came out of agreement with another mutual agreement. But, primary intention of both parties are to have other’s promise performed.

Some contract need some extra action to make legal enforcement possible – like payment of stamp duty on rent agreement, to register a sale deed of an immovable property.

One interesting fact (food for thought)  for corporate law is legal status of listing agreement which for long time treated as law by Indian corporate houses. That was merely an agreement between stock exchanges and listed entities. This agreement was enforceable contract but not law as such. Yes, listing agreement was in standard format suggested by SEBI as regulatory authority having jurisdiction over stock exchanges not as regulatory authority having jurisdiction over listed entities.

Note – Major portion of this post was written in response of a Quora query here.

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