All contracts are agreement but all agreement are not contracts latest.docx

7/30/2019 All contracts are agreement but all agreement are not contracts latest.docx

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All contracts are agreement but all agreement are not contracts

Answer; A contract is a legally binding agreement or relationship that exists between two ormore parties to do or abstain from performing certain acts. A contract can also be defined as a

legally binding exchange of promises between two or more parties that the law will enforce. For

a contract to be formed an offer made must backed acceptance of which there must beconsideration. 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.

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.

All contracts are agreement because there must be mutual understanding between two parties

for a contract to be formed. All parties should agree and adhere to the terms and conditions of an

offer.

The following cases illustrate ways in which all contracts are agreements ;

In the case of invitation to treat, where an invitation to treat is merely an invitation to make an

offer. When a firm's offer is accepted it results into a contract provided other elements of

contracts are accepted.

Considering person A buying a radio on hire purchase from person B who deals with electronicsand its appliances. Both parties must come to an agreement on payment of monthly installment

within specified period of time. Such an agreement result to specialty contract which a contract

under seal.

Allcontracts are agreement until avoided for example, avoidable contract where one of theparties can withdraw from it if s/he wishes. This occurs due to minor agreement and

misrepresentation or undue influence. Considering a case where person A make contract withperson B but during the contract period B realizes that he was engaged to perform an agreement

under undue influence.

Definition of contract

According to section 2(h) of the Indian Contract Act: " An agreement enforceable by law is a

contract." A contract therefore, is an agreement the object of which is to create 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. We shall now examine these

elements detail.

1. Agreement. As per section 2 (e): " Every promise and every set of promises, forming theconsideration for each other, is an agreement." Thus it is clear from this definition that a

'promise' is an agreement. What is a 'promise'? the answer to this question is contained in section


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2 (b) which defines the term." When the person to whom the proposal is made signifies his

assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a

promise."

An agreement, therefore, comes into existence only when one party makes a proposal or offer to

the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. Inshort, an agreement is the sum total of 'offer' and 'acceptance'.

On analyzing the above definition the following characteristics of an agreement become evident:

(a) At least two persons. There must be two or more persons to make an agreement because oneperson cannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of

the agreement in the same sense and at the same time.

2. Legal obligation. As stated above, an agreement to become a contract must give rise to a legalobligation i.e., a duty enforceable by law. If an agreement is incapable of creating a dutyenforceable by law. It is not a contract. Thus an agreement is a wider term than a contract. " All

contracts are agreements but all agreements are not contracts,"

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 dutyenforceable by law for the simple reason that the parties never intended that they should be

attended by legal consequences

Essential Elements of a Valid Contract

A contract has been defined in section 2(h) as "an agreement enforceable by law." To beenforceable by law, an agreement must possess the essential elements of a valid contract as

contained in sections 10, 29 and 56. According to section 10, all agreements are contracts if they

are made by the free consent of the parties, competent to contract, for a lawful consideration,

with a lawful object, are not expressly declared by the Act to be void, and where necessary,satisfy the requirements of any law as to writing or attention or registration. As the details of

these essentials form the subject matter of our subsequent chapters, we propose to discuss them

in brief here.

The essential elements of a valid contract are as follows.

1. Offer and acceptance. There must a 'lawful offer' and a 'lawful acceptance' of the offer, thus

resulting in an agreement. The adjective 'lawful' implies that the offer and acceptance must

satisfy the requirements of the contract act in relation thereto.

2. Intention to create legal relations. There must be an intention among the parties that theagreement should be attached by legal consequences and create legal obligations.


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Agreements of a social or domestic nature do not contemplate legal relations, and as such they

do not give rise to a contract. An agreement to dine at a friend's house in not an agreement

intended to create legal relations and therefore is not a contract. Agreements between husbandand wife also lack the intention to create legal relationship and thus do not result in contracts.

3. Lawful consideration. The third essential element of a valid contract is the presence of'consideration'. Consideration has been defined as the price paid by one party for the promise of

the other. An agreement is legally enforceable only when each of the parties to it gives

something and gets something. The something given or obtained is the price for the promise andis called 'consideration' subject to certain exceptions; gratuitous promises are not enforceable at

law.

The 'consideration' may be an act (doing something) or forbearance (not doing something) or a

promise to do or not to do something. It may be past, present or future. But only those

considerations are valid which are 'lawful'. The consideration is 'lawful'. unless it is forbidden by

law; or is of such a nature that, if permitted it would defeat The provisions of any law; or is

fraudulent; or involves or implies injury to the person or property of another; or is immoral; or isopposed to public policy (sec.23).

4. Capacity of parties. The parties to an agreement must be competent to contract. But the

question that arises now is that what parties are competent and what are not. The contracting

parties must be of the age of majority and of sound mind and must not be disqualified by any lawto which they are subject (sec.11). If any of the parties to the agreement suffers form minority,

lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special

cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is

entitled to be reimbursed from their estate (sec 68).

5. Free consent. Free consent of all the parties to an agreement is another essential element. Thisconcept has two aspects.(1) consent should be made and (2) it should be free of any pressure ormisunderstanding. 'Consent' means that the parties must have agreed upon the same thing in the

same sense (sec. 13). There is absence of 'free consent,' if the agreement is induced by

(i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v) mistake (sec. 14). Ifthe agreement is vitiated by any of the first four factors, the contract would be voidable and

cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the

aggrieved party) can either reject the contract or accept it, subject to the rules laid down in theact. If the agreement is induced by mutual mistake which is material to the agreement, it would

be void (sec. 20)

6. Lawful object. For the formation of a valid contract it is also necessary that the parties to an

agreement must agree for a lawful object. The object for which the agreement has been entered

into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply

injury to the person or the other of the reasons mentioned above the agreement is void. Thus,when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover

the rent through a court of law or a contract for committing a murder is a void contract and

unenforceable by law.


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7. Writing and registration. According to the Indian contract Act, a contract to be valid, must

be in writing and registered. For example, it requires that an agreement to pay a time barred debt

must be in writing and an agreement to make a gift for natural love and affection must be inwriting and registered to make the agreement enforceable by law which must be observed.

8. Certainty. Section 29 of the contract Act provides that " Agreements, the meaning of which isnot certain or capable of being made certain, are void." In order to give rise to a valid contract

the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the

meaning of the agreement, for otherwise, it cannot be enforced

Illustration. A, agrees to sell B " a hundred ton of oil" there is nothing whatever to show what

kind of oil was intended. The agreement is void for uncertainly.

9. Possibility of performance. Yet another essential feature of a valid contract is that it must be

capable of performance.

Section 56 lays down that "An agreement to do an act impossible in itself is void". If the act isimpossible in itself, physically or legally, the agreement cannot be enforced at law.

Illustration. A agrees with B, to discover treasure by magic. The agreement is not enforceable.

10. Not expressly declared void. The agreement must not have been expressly declared to be

void under the Act. Sections 24-30 specify certain types of agreements that have been expresslydeclared to be void. For example, an agreement in restraint of marriage, an agreement in restraint

of trade, and an agreement by way of wager have been expressly declared void under sections

26, 27 and 30 respectively.

It is a valid and true statement. Before we can critically examine the statement, it is necessary tounderstand the meaning of agreement and contract. According to section 2(a) "every promise on

every set of promises forming the consideration for each other an agreement.

It is fact an agreement is a proposal and its acceptance, by which two or more person or partiespromises to do abstain from doing an act. But a contract according to section 2(h) of the Indian

Contract Act, "An agreement enforceable by law is a contract. It is clear these definitions that the

there elements of a contract ore

(a) Agreement Contractual Obligation

(b) Enforceability by Law.

For Example: X invites his friend to tea and the latter accepts the invitation. This is a social

agreement not a contract because it does not imply any legal obligation.

We can say that (a) All contracts are agreements, (b) But all agreements are not contracts. (A)

All Contracts are Agreements

For a Contract to be there an agreement is essential; without an agreement, there can be nocontract. As the saying goes, "where there is smoke, there is fire; for without fire, there can be no


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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.

Another essential element of a contract is the legal obligation for the parties to the contract, there

are many agreements that do not entail any legal obligations. As such, these agreements cannot

be called contracts.

For Example:

A gives his car to B for repair and B asks for Rs. 200 for the repair works. A agrees to pay the

price and B agrees to repair the car. The agreement imposes an obligation on both. The thirdelement of a contract is that the agreement must be enforceable by Law. If one party fails to keep

his promise, the other has the right to go the court and force the defaulter to keep his promises.

There are other elements are:

1. Offer and acceptance,

2. Legal obligation,

3. Lawful consideration,

4. Valid object,

5. Agreement not being declared void by Law,

6. Free consent,

7. Agreement being written and registered,

8. Capacity to contract,

9. Possibility of performance from what has been discussed. It is clear that all contracts are

agreements.

All Agreements are not Contracts :

An agreement is termed a contract only when it is enforceable by law. All agreements are not

necessarily legally enforceable. It can rightly be said that an agreement has a much wider scopethan a contract. For example that agreements are not legally binding are an invitation to dinner or

to go for a walk and its acceptance. These are agreements not contracts.

An agreement does not necessarily imply a legal obligation on the parties to the agreement. It is

import here to clarify what exactly is an obligation. Obligation is a legal tie which imposes upona person or persons the necessity of doing or abstaining from doing definite act or acts.

An agreement need not necessarily be within the framework of law and be legally enforceable. If

it is, then it is a contract. A promises B to do physical harm to C whom, the latter does not likeand B promises to pay A Rs. 1000 to do that, it cannot be termed as a contract because such an

act would be against the law. Any agreement of which the object or consideration is unlawful is

void and cannot be called a contract.


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It would be clear from what has been said so far that an agreement has a much wider scope than

a contract. An Agreement implies fulfilling some agreed condition. It does not necessarily imply

that the stipulated conditions conform to the law and are enforceable by it. It may be said that anagreement is the genus of which contract is the species. It also makes it clear that all agreements

are not contracts but all contracts are agreements.

capacity to Contract - Any one cannot enter into a contract; he must be competent to contract

according to the law. Every person is competent to contract if

1. He is of the age of majority2. He is of sound mind3. He is not disqualified from contracting by any law to which he is subject4. There may be a flow in the capacity of parties to the contract. It can be possible due to

minority, lunacy,idiocy, drunk-ness, drug addition (unsound mind)

Capacity to contract means the legal competence of a person to enter into a valid contract.

Usually the capacity to contract refers to the capacity to enter into a legal agreement and thecompetence to perform some act. The basic element to enter into a valid contract is that s/he

much have a sound mind.

Certain class of people are exempted from the category of people who are capable of enteringinto contract:

1. infants/minors;

2. insane;

3. people under the influence of drug;

4. bankrupt;and

5. enemy alien.

Doctrine of the ultra-vires

Any transaction which is outside the scope of the powers specified in the objects clause of theMA and are not reasonable incidentally or necessary to the attainment of objects is ultra-vires the

company and therefore void. No rights and liabilities on the part of the company arise out of such

transactions and it is a nullity even if every member agrees to it.

Consequences of an ultra-vires transaction: -

1. The company cannot sue any person for enforcement of any of its rights.

2. No person can sue the company for enforcement of its rights.


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3. The directors of the company may be held personally liable to outsiders for an ultra vires.

However, the doctrine of ultra-vires does not apply in the following cases: -

1. If an act is ultra-vires of powers the directors but intra-vires of company, the company is

liable.

2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, thearticles can be altered to rectify the error.

3. If an act is within the powers of the company but is irregularly done, consent of theshareholders will validate it.

4. Where there is ultra-vires borrowing by the company or it obtains deliver of the propertyunder an ultra-vires contract, then the third party has no claim against the company on the basis

of the loan but he has right to follow his money or property if it exist as it is and obtain an

injunction from the Court restraining the company from parting with it provided that heintervenes before is money spent on or the identity of the property is lost.

5. The lender of the money to a company under the ultra-vires contract has a right to make

director personally liable.

The term corporate veil is associated with an incorporated business body i.e. a Company. A

corporate body has a distinct identity from its members but it is simply legal fiction. In reality

Individual/persons are the ones who run a company in hopes of acquiring benefits out of it. Theword veil in its verb form means- to hide something or make it obscure in order to conceal. It

might happen that some individuals indulge in fraudulent or unlawful practices in the garb of

running a corporate body. To investigate the reality behind the window dressing, the courts mighthave to pull up the veil and discover the true culprit. This is known has lifting the CorporateVeil.

Courts usually do not interfere in the affairs of those running the company. This has been made

very clear in the case of Salomon v. Salomon where the court strictly adhered to the principal of

separate legal entity and avoided lifting the veil.

Process of imposing liability for corporate activity, in disregard of the corporate entity, on

a person or entity other than the offending corporation itself. There are times when the

court will ignore the corporate entity and strip the organizers and managers of the

corporation of the limited liability that they usually enjoy. In doing so, the court is said topierce the corporate veil.

Corporate Veil Definition

A corporate veil, defined as the structure which protects shareholders in a corporation from

personal liability in the event of business failure or liability, is important to incorporated business
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owners. Usually these shareholders are not responsible personally for any mistakes the business

makes because it is a private, commercial entity. However, occasionally corporate veil piercing

can occur and end with shareholders responsible for activities of the business. This is the essenceof the corporate veil piercing definition; shareholders unprotected despite taking part in a

limited liability legal structure.

Corporate Veil Explanation

A corporate veil, explained usually as the protection which does not exist in other unlimited

liability business entities, is a risk mitigation tool. The benefit of choosing a corporation is the

corporate veil doctrine; though owners pay the expense of corporate double-taxation they also

receive the protection of incorporation. This benefit is recommended for anyone who can afford

the price of incorporating a business. Many companies reduce additional costs of this by

incorporating in Delaware. Laws here provide unique benefits to processing paperwork throughthis state.

A corporate veil, however, is not fool-proof. This raises the question "how can the corporateveil be pierced"? The answer depends on a variety of factors but follows some generalities.

Situations where a corporation exists as a shell, either for fraud, illegal activities, or violation of

legal agreements, lifting the corporate veil can occur. In this situation the owners can be liable,for either prosecution or damages, as though they were acting outside of their corporation.

Corporate Veil Example

Lenny is an owner of a business. After several years of operations, he has successfully grown his

company. When an offer to sell the business comes in he is happy to take it. This will provide for

an early retirement. To do this, Lenny must sign a non-compete agreement saying that he will notprovide competition for the business he just sold.

After a few months, Lenny feels bored. He enjoyed the constant problem solving associated with

his business. Lenny decides to start again, the same type of business, because he has theexpertise. This will prove to be a terrible mistake.

Soon after starting the new company Lenny is sued for breech of contract. The new owners of hisold business have noticed that, despite the contract, Lenny has started a competing business. The

court sees that a corporate veil piercing occured; even though Lenny has incorporated the new

business he will be tried as though he was a sole proprietor.

Lenny, unfortunately, has committed corporate veil fraud. He will be punished for his actions.

His patience would have suited him well here.

Situations like this show piercing the corporate veil examples in the government. One must becareful to comply and avoid this mishap.
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bailment

Transfer ofpersonal property by one party (the bailor) in the possession, but not ownership, of

another party (the bailee) for a particular purpose. Such transfer is made under an express or

implied contract (called bailment contract or contract of bailment) that the property will be

redelivered to the bailor on completion of that purpose, provided the bailee has no lien on the

goods (such as for non-payment of its charges). The bailee is under an obligation to take

reasonable care of the property placed under its possession. Bailment contracts are a common

occurrence in everyday life: giving clothes to a launderer, leaving car with an auto mechanic,

handing over cash or other valuable to a bank, etc.

A sale involves transfer of Bailment involves physical

ownership and physical transfer transfer of property, ownership is

of property. not disturbed.

Parties involved are called seller Parties involved are called bailorand buyer. and bailee.

The property is never taken back Property is taken back as per

after transfer. terms of bailment.

Contract is over when buyer takes Contract is not over when bailee

the possession of property after takes the possession as the

payment. property is to be returned back to

the bailor.

We enter into various contracts so that we can carry on with our day to day activities. It is almost

impossible to run a company or get a credit card without entering into some kind of a contract. In

India, the formation and validation of a contract is governed by the Indian Contract Act, 1872.

Contract Act: What is Indemnity?

As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, a contract by

which one party promises to save other from loss caused to him by the conduct of the promisor

himself, or by the conduct of any other person. Does this sound like a lot of mumbo jumbo?

Well, this section is not so difficult to understand when you relate it to practical house. Suppose youare hired by a newspaper to write articles for them as a freelancer. Typically, your contract would

have an indemnity clause so that if you write something against a very important person and that

person files a suit against the newspaper for defamatory material, the newspaper can show the

indemnity clause that you signed, protecting them from any form of loss caused due to your conduct.

Then, the onus of fighting the defamation suit becomes your responsibility. Thats not all about the

contract of indemnity as it is incorporated in most contracts, particularly in real estate purchase and

bank loans. A person who promises to bear the loss is known as indemnifier and the person whose
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loss is covered is known as indemnified. These types of contracts are mainly formed between

insurance companies and their customers.

Under Section 126, of the Act, a contract of guarantee is defined as, a contract to perform the

promise, or discharge the liability of a third person in case of his default. This type of contract is

formed mainly to facilitate borrowing and lending money.

The three parties involved in this type of contract are:

Surety: is the person by whom the guarantee is given Principal Debtor: is the person from whom the assurance is given. Creditor: is the person to whom the guarantee is given.

Contract Act: Differences between Contract ofIndemnity and Guarantee

A few important distinctions between a contract of indemnity and contract of guarantee are as follows:

Number of Parties: In a contract of indemnity only two parties are involved, whereas in acontract of guarantee, three parties are involved.

Purpose: A contract of indemnity is formed to provide compensation of loss. A contract ofguarantee is formed to give assurance to the creditor in lieu for his money.

Nature of Liability: In a contract of indemnity, the indemnifier is the sole person who is heldliable. In a contract of guarantee, the liability is shared by the surety and principal debtor. The

principal debtor owes the primary liability and the surety owes the secondary liability.

Final Legal Take Away Tip: In a contract of indemnity, the liability of the indemnifier arises only on

occurrence of a loss or mishap. However, in a contract of guarantee, the liability is a fixed legal

liability or debt, the execution of which is guaranteed by the surety.

In both the contracts, the motive is to insure a person against the probable loss out of the deal.

But there are many points of distinction between the two which are explained below.

(1) In a contract of indemnity, the liability of the indemnifier is primary in nature, while in a

contract of guarantee the liability of the surety is secondary and arises only on the default of

the principal debtor.

(2) In a contract of indemnity there are two parties to the contract, viz., the indemnifier and the

indemnity holder. In a contract of guarantee there are three parties, viz., the creditor, the

principal debtor and the surety.

(3) In a contract of indemnity, the liability of the indemnifier arises only on the happening o:

contingency whereas in the case of a contract of guarantee there is an existing debt or

the performance of which is guaranteed by the surety.


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(4) In a contract of guarantee where a surety discharges a debt payable by the principal debtor

to the creditor, he on such payment can proceed against the principal debtor in his own right.

But in the case of a contract of indemnity, the indemnifier cannot sue third parties in his own

name, but must bring the suit in the name of the indemnified.

(5) A contract of indemnity is for the reimbursement of a loss while a contract of guarantee is

for the security of the creditor.

(6)In the case of a contract of indemnity it is not necessary for the indemnifier to act at the

request of the indemnified, whereas in the case of a contract of guarantee it is necessary that

the surety should give the guarantee at the request of the debtor.

(7)In a contract of indemnity there is only one original and independent contract between the

indemnifier and indemnified whereas in a contract of guarantee there are three contracts. One

between the creditor and the principal debtor, second between the creditor and the surety and

the third between the surety and the principal debtor.

(8) All parties in a contract of indemnity must be competent to contract. As a special case,

when a minor is principal debtor, the contract of guarantee is still valid.

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All contracts are agreement but all agreement are not contracts latest.docx