Agreement & Contracts
“Priya owns a fruit shop and Arjun owns a supermarket. Arjun wants Priya to sell fruits from her shop to him on a monthly basis for which he will be paying an amount to Priya on each delivery. Priya agrees and tells about this to her friend Mr.Lexi.”
Mr Lexi advises Priya that she must first enter into an “agreement” or “contract” with Arjun so that Arjun does not cheat Priya.
Mr Lexi explains the following concept of contract:-
What is an agreement?
An agreement is any understanding on a particular matter reached between two or more parties.
Usually an agreement starts with one party ie., offeror offers/proposes something and other party who is known as the offeree is free to accept or reject the offer. If the offeree accepts the offer then it becomes an agreement. Agreement = Offer + Acceptance
Example: Like in the instant case, Arjun is the offeror and Priya is the offeree.
What is a contract?
Section 2(h), Indian Contract Act defined Contract as
“Any agreement between two or more people which is enforceable by law is known as a contract.”
[Contract = Agreement + Enforceability]
Offer + Acceptance = (Promise + Consideration) = Agreement + Enforceability by Law = Contract
Example: In the instant case, Arjun makes an offer to Priya who accepts the offer, which basically means that Priya promises to deliver fruits as a result of which she would be receiving an amount. This amount is consideration. Now, the entire process will be a contract once both enter into a deed.
What are the essential elements of a contract?
According to Indian Contract Act, 1872 ; the key elements of a contract are:
- Agreement – There should be an agreement between two or more parties
- Intention to Create a Legal Relationship – The parties to the contract must have the intention to create a legal obligation. Mere social or domestic agreements are not contracts as they are not considered a legal relationship as such.
Example: A and B agree to go to a movie on coming Sunday. A does not turn in resulting in loss of B’s time. B cannot claim any money or compensation from B since the agreement to watch a movie is a not a contract as there is no consideration and no legal relationship has been created.
- Lawful Consideration – An agreement to be enforceable by law must have a valid consideration.
Example: No unlawful consideration like A tells B that if B performs the task as told by A, he will kill his enemy who is disturbing him. This is an unlawful consideration. But, if A tells B that he will pay him Rs. 500/- for the delivery of his goods to X, then it is a lawful consideration.
- Competent Parties – The parties should be capable of entering into a valid contract. A person is competent to enter a contract if :
1. Attained the age of majority (18 years and above)
2. Is of sound mind
3. Not disqualified by the law (He is not an insolvent etc.)
- Free Consent – Consent of the parties must be genuine and they must have agreed upon the same thing in the same sense. Consent is said to be free when it is not caused by:
1. Coercion (Section 15)
2. Undue Influence (Section 16)
3. Fraud (Section 17)
4. Misrepresentation (Section 18)
5. Mistake (Section 20, 21, 22)
- Lawful Object – The object of the agreement should not be : Immoral or opposed to public policy by the law
2. Forbidden by law
3. Involves or implies injury to person or property
- Possibility of Performance:
The terms of the agreement should be capable of performance. An agreements to do act, impossible in itself cannot be enforced. Eg: A agrees to B to discover treasure by magic. The agreement is void because the act in itself is impossible to be performed from the very beginning.
- Void Agreements – An agreement should not be expressly declared as void. The agreement should be such that it should be capable or being enforced by law. Certain agreements have been expressly declared illegal or void by the law.
What does consideration mean in relation to a contract? [Section 2(d)]
The term “Consideration” refers to something of value in exchange of the performance of the contract.
Example: The money that Priya receives from Arjun and the Fruits that Arjun gets from Priya are both called as the Consideration.
What is the difference between a contract and agreement?
|When a proposal is accepted by the person to whom it is made, supported by a lawful consideration then it is an agreement.||Any agreement enforceable by law is known as a contract.|
|Agreements do not create any legal obligation.||Contracts are enforceable by law and hence creates a legal obligation.|
|An agreement may or may not be enforceable by law.||A contract is enforceable by law.|
|All agreements need not be a contract.||All agreements are contracts if made by the free consent of the parties.|
Can a minor enter into a contract?
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In A Nutshell
- Mere social or domestic agreements are not contracts as it is not considered to be a legal relationship
- A contract is an agreement between two or more parties which is enforceable by law
- All the essential elements of a contract should be fulfilled for it to be enforceable by law
- All contracts are to be written and registered for the best interest of the parties
- A minor cannot sign a contract unless he signs it along with a legal guardian