This article is written by Ishan Arun Mudbidri from Marathwada Mitra Mandal’s Shankarrao Chavan Law College, Pune. This article talks about the difference between a contract and an agreement.
This article has been published by Sneha Mahawar.
Table of Contents
“Just sign the Goddamn contract!”, all of us at some point in our lives might have come across this statement, either in movies or in real life. Signing a contract can be life-changing for many and just an everyday thing for others. Besides this, the term agreement also gets frequently mentioned. Now, one might think both these terms are one and the same, however many times that’s not the case.
The Indian Contract Act, 1872
All contracts in India come under the purview of the Indian Contract Act, 1872. This enactment makes sure that a contract is well regulated and legal.
Section 10 of the Act mentions certain conditions which need to be followed for a contract to be valid and legal. These conditions are as follows:
Offer and acceptance
A contract must be made between two parties. One of the parties should make an offer and the other party should give his/her acceptance to it. Without both these terms, a contract cannot come into existence.
Consideration and object
It’s a human tendency to do a job and expect something in return for it. While drafting a contract too, this is an important condition. However, Section 23 of the Act states that the object and consideration given for a contract should be lawful.
Capacity to contract
Both the parties to a contract should be competent enough to get into a contract, otherwise the contract shall be void.
Both the parties to a contract should enter into it with their own free will. If consent is taken by coercion (Section 15), undue influence (Section 16), fraud (Section 17), misrepresentation (Section 18), or mistake (Section 20), then such a contract shall be unlawful.
All you need to know about a contract
Now that we know contracts in India are regulated under the Indian Contract Act 1872, it is important to understand how the Act defines a contract. Section 2(h) of the Act states that a contract is an agreement that is enforceable by the law. Hence, in simple words, a contract is a piece of paper, signed between two parties, and is enforceable by law. So can anyone enter into a contract? Section 11 of the Act states that a person who is below the age of 18 years, is of unsound mind, and is disqualified by the law cannot enter into a contract. As mentioned above, Section 23 bars a contract with an unlawful object and consideration and deems it unlawful. Therefore, if a person gives someone a contract to kill another person, that contract would be void. Similarly, a 10-year old kid signing a business deal, also won’t be considered a contract. Hence, a contract is a legally binding document, which consists of a lawful task or job in return for some consideration to both parties.
Importance of entering into a contract
In today’s world, contract management is a thing! It is a practice followed by most companies to keep their contracts and clients safe. So why is this important?
Helps in maintaining confidentiality
Entering into contracts helps in maintaining secrecy. Once the contract is signed, both parties know that they are legally bound to maintain confidentiality. Spilling any part of the contract to a third party might also break the trust of the other person and as a result, might also break the contract.
Provides proof and security
All the clauses mentioned in the contract are clear and precise. Hence, this avoids a lot of confusion and might also avoid conflicts between the parties as there is proper proof of it. Further, both parties know they have something to look back on in the form of the contract they entered into. Hence, this provides them with a sense of security.
Drafting a contract
Drafting a contract is a tedious and long process. Hence, the basic steps to be followed while drafting are mentioned below.
Terms and considerationS
As a contract is made between two parties, the terms of the contract should benefit both sides. Further, there also has to be some consideration mutually decided and benefiting both the parties. The terms of a contract can be oral or written but it will be helpful to avoid confusion and by having a record of the terms and conditions of the contract. Therefore an expressed contract is preferred to an oral contract.
The contract should be drafted keeping in mind the relevant laws. The jurisdiction of the contract can also be decided by the parties beforehand. This means that the parties can mutually agree to refer to the disputes arising out of this contract to a particular court. For example, the jurisdiction of this contract extends to all courts in Mumbai.
Confidentiality and dispute resolution clause
There has to be a confidentiality clause and a dispute resolution clause in a contract. This will help in maintaining secrecy between the parties, and breach of contract will be kept in mind.
Termination of the contract
The duration and termination of the contract should be precisely mentioned. Serving a prior notice before the termination will be helpful.
Many times, the original contract offered is countered by the other party. Hence, the counteroffer or another different offer, if made, should be negotiated properly.
A remedy/compensation clause should be added in the contract, to offer some kind of protection in case of a breach.
Signing the contract
After going through the terms, a contract must be signed by both parties. The signing dates, etc. should also be mentioned on the last page of the contract. After both the parties have signed the contract, it shall be legally binding on them.
How to negotiate a contract
Before making it official, a contract might have certain terms and conditions that are not accepted by the other party. Hence, it is important to negotiate a contract properly. Mentioned below are some steps on how one can negotiate a contract.
Avoiding selfish interests
While negotiating a contract, the parties should keep their personal interests aside. Studying the market and industry standards, both parties should arrive at a fair conclusion.
Conveying the message clearly
The negotiations should be done in a clear and precise manner. The counterpoints should be broken down into separate parts and conveyed properly.
Revenue and risks
Most contracts are negotiated, because of revenues and risks. Hence, these factors should be kept aside, and the only focus should be on how to make this opportunity count and make the most out of the task given together. There’s no doubt that revenue and risks should be considered, however, if the job in hand is not completed properly, the revenue is anyway not going to come.
Before negotiating, doing proper and deep research of the agenda in hand will be more helpful.
Come to a mutual solution
In case a counteroffer is made, the offer should be with some concession or something that will also benefit the other party. Further, the negotiations should be done in such a manner, that the other party is willing to listen and carry forward. It should be straight-up facts. If the negotiations are stretched for a long time, each meeting should be conducted in a positive manner, and by looking for solutions rather than arguing.
All you need to know about an agreement
Section 2(e) of the Indian Contract Act, 1872 states that an agreement is a set of promises that forms a consideration for both parties. Now, this term promise is defined in Section 2(b) which states that an accepted proposal or offer, becomes a promise. So in simple words, a promise is basically an offer made by a person to another, and if that person accepts the offer, it becomes an agreement.
Just like a contract, an agreement that is not enforceable by law is void. This is given in Section 2(g) of the Act. To prove this point, the Indian Contract Act, also mentions certain cases where agreements are expressly void, they are:
Agreement in restraint of marriage
Section 26 of the Act states that an agreement restraining someone’s marriage shall be void. This means that an agreement stopping a person from marrying by his own choice or will is void. The exception to this provision is a minor. In the case of Venkatakrishnaiah v. Lakshminarayana, (1908) it was held that in a situation where the father is giving consideration for marrying his daughter, such a marriage is void as it violates Section 23 of the Indian Contract Act.
Agreement in restraint of trade
Section 27 of the Act states that an agreement made to stop a person from doing his work or profession, in return for some consideration is void. This means that when a person benefits from someone stopping his/her work, such an agreement shall be in restraint of trade, hence void. In the case of Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd. (1967), it was held by the Court that a person might be restrained from following his trade, due to an agreement entered into by him. In this case, the term freedom of trade should be used.
Agreement in restraint of legal proceedings
Section 28 of the Act states that any agreement that stops the other party from enforcing his/her rights of going to a court for breach of contract, is said to be an agreement in restraint of legal proceedings.
Wagering agreements are declared to be void under Section 30 of the Indian Contract Act, 1872. In a situation where a suit is filed to claim something won in a wager, which cannot be enforced by the law.
Legal provisions to be followed to make an agreement valid
There are various kinds of agreements like a memorandum of understanding, partnership agreement, non-disclosure agreement, etc. All these seem different right? Yes, they are used for different purposes, however, every agreement must go through certain statutory provisions to make the agreement valid. Some of these provisions are as follows:
Under the Indian Stamp Act 1899, all agreements in India must be stamped. This makes the agreement legally valid, and enforceable.
The Indian Registration Act 1908, ensures the registration of agreements and other documents.
Section 17, mentions certain agreements that must be compulsorily registered under the Act. These include lease deed, sale deed, agreement to sell, gift deed, etc.
Acquiring a license is not a legal provision to make an agreement valid but, it is a type of agreement through which the person grants the right to his intellectual property, trademark, patent, or goods that are used by him, to another person. Here the person granting the right to use property is the licensor, and the person acquiring the right is known as the licensee.
Key differences between an agreement and a contract
Now that we might have got a little understanding regarding why contracts and agreements are not the same, let us summarize the key differences between the two.
|Point of difference
|When an agreement is enforceable by law, it becomes a contract.
|When an offer made by a party is accepted, it becomes an agreement
|Consideration has to be given.
|Agreements can be formed without consideration.
|Section 2(h) of the Indian Contract Act 1872
|Section 2(e) of the Indian Contract Act 1972
|Written contracts are generally preferred over oral contracts.
|Agreements can be verbal or written.
|Every contract has a legal obligation.
|Agreements may or may not have a legal obligation.
Why all contracts are agreements but all agreements are not contracts
Now, as we have seen what both these terms mean we might have understood that these two terms look very similar and are almost the same. Two parties are needed, there’s a consideration, offer, and acceptance, etc. in both these documents. But it has been proved that both these are slightly different.
A contract has to be a formal agreement between two or more parties and should be enforceable by law, whereas an agreement may or may not be formal. For example, for a business deal just accepting an offer won’t be enough. It should be written down on a piece of paper, by ensuring that all the laws are followed, and there’s a consideration between both the parties. So, this is a contract. In another example, your friend asks you whether he can borrow your laptop for a few days, and you agree to this. Hence, this is an agreement, which is informal and there’s no consideration involved. But if you tell your friend to pay a certain amount of money for the number of days he has borrowed your laptop, then it will become a contract.
Hence a contract requires offer, acceptance, mutual consent by the parties, some consideration, and is enforceable by law. Whereas, an agreement shall be valid, even if all these requirements are not followed. So, all those agreements that are enforceable by law, are contracts but, all contracts are not agreements because some agreements can be informal as mentioned in the above example.
Is an agreement better than a contract
Agreements and contracts are both important in their own ways. Let’s analyse the business deal example mentioned above. A business deal is an important document. So, as an agreement is a set of promises, is it valid to be operational here? Just by giving a promise without any written statement or without any consideration, do you think the other party will accept it? The obvious answer is no. So in such a case, a written contract is needed. Contracts can be oral also but they should have the above-mentioned elements of a contract.
On the other hand, agreements can be more preferable if there’s no consideration involved as drafting a contract can be a boring and long process.
If you want to be more secure and cautious with your deal, then a contract is a better option. So as I mentioned before, both these terms are equally useful and important.
Examples of agreements that are contracts
An agreement becomes a contract if it has all the elements of a contract. Mentioned below are a few types of agreements which are contracts.
This type of agreement may sound confusing, but it’s not. A contractual agreement is a legally binding agreement enforceable by law. This type of agreement can be used for business contracts, employment contracts, and sales contracts.
Non-disclosure agreements despite being called agreements are enforceable in the court of law and are often contracts.
An offer letter given to an employee is an agreement which is a contract because it is legally binding and has some consideration i.e., salary.
Master services agreement
This is another agreement that can be called a contract. This is because it has all the elements of a valid contract like offer, acceptance, consideration, etc.
As we can conclude from the above analysis, both contracts and agreements are equally important and many a time one and the same. So, the next time you are confused about whether to draft a contract or an agreement, the only thing that you must ensure is whether the document is enforced by law. The other elements of a valid contract are also important but, as long as it is legal, both are the same.
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