No doubt it is a valid and true statement. Before critically discussing the statement, we must know the exact and basic meanings of the two terms contract and agreement in the context of business law. For understanding the meaning, we have to go to the contract act 1872 that is applicable in subcontinent. A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. There must be offer and acceptance for a contract to be formed. An offer must backed by acceptance of which there must be consideration. Both parties involved must intend to create legal relation on a lawful matter which must be entered into freely and should be possible to perform.
According to section 2(h) of the Contract Act 1872:
” An agreement enforceable by law is a contract.”
A contract therefore, is an agreement the which creates a legal obligation i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially consists of two elements:
(1) An agreement and (2) Legal obligation i.e., a duty enforceable by law.
A promises to sell a horse to B for Rs.100,000, and B promises to buy horse at that price.
All contracts are agreements:
For a Contract to be there an agreement is essential; without an agreement, there can be no contract. As the saying goes, “where there is smoke, there is fire; for without fire, there can be no smoke”. It could will be said, “where there is contract, there is agreement without an agreement there can be no contract”. Just as a fire gives birth to smoke, in the same way, an agreement gives birth to a contract.
What is agreement?
An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honor of the parties for its fulfillment rather than being in any way enforceable.
As per section 2 (e) of Contract At 1872:
” Every promise and every set of promises, forming the consideration for each other, is an agreement.” Thus it is clear from this definition that a ‘promise’ is an agreement.
All agreements are not contracts
As stated above, an agreement to become a contract must give rise to a legal obligation. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract.
Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend’s house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences
On the other hand, legal agreements are contracts because they create legal relations between the parties.
EXAMPLE: a- A invites B to dinner. B accepts this invitation but does not attend the dinner. A can not sue B for damages. It is social agreement because it does not create legal obligation. So it is not a contract.
b- A promises to sell his car to B for one million. It is legal agreement because it creates legal obligations between the parties. So it is a contrac
According to section 10 of the contract act 1872,
“All agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and not hereby declared to be void.”
Thus an agreement becomes a contract when at least the following conditions are satisfied.
2-competency of the parties
In a nut shell, an agreement is the basis of a contract and contract is the structure constructed on these basis. An agreement starts from an offer and ends on consideration while a contract has to achieve an other milestone that is enforceability. Due to this, breach of an agreement does not give rise to any legal remedy to the aggrieved party while breach of contract provides legal remedy to the aggrieved party against the guilty party. Thus we can say that all contracts are agreements but all agreements are not contracts.
4- lawful object.