Agreement and Contract A Legal Analysis

AGREEMENT AND CONTRACT; A LEGAL ANALYSIS <!--[if gte mso 10]> AGREEMENT AND CONTRACT; A LEGAL ANALYSIS By Khurram Abbas Sheikh, Advocate, High Court, Lahore Literature does not differentiate between "agreement" and "contract" but the law does. Both the terms are used interchangeably in common parlance but the Law of Contract in Pakistan draws a sharp: but subtle line of distinction between the two. At times, it is seen that pleadings and conveyancing of lawyers and even judgments of Courts use the term "agreement" to mean "contract", ,thereby rendering this line of distinction even 'more elusive to get at. Obviously, an agreement can be said to be a contract and a contract to be an agreement, but merely by such an expression they do not become synonymous in legal nomenclature. Thus let us analyse the essential differences between "agreement" and "contract". A study of the Contract Act, 1872, and other related laws reveals that under these two terms there are two divergent yet inter-related concepts. "Agreement" has been defined under the law1 as "Every promise and set of promises, forming the consideration for each other". Term "promise" is also sometimes used to denote "agreement"2 However, "agreement" has also been generally defined as no more than a concord;3 a mutual understanding4; a manifestation of mutual assent5 or a meeting of minds6. On the other hand, law defines a contract as "An agreement enforceable by law"7. Juristic works, too, assign almost the same definition to "contract". Just a glance at the above definitions bears out that a contract is a kind or a specie of agreement; that agreement is presumably the first formal step, a transaction, that may lead to a contract8; that all contracts are agreements but all agreements are not contracts9; that agreement in some respects is a broader term than contract10 and, ultimately, that the two are distinct from each other inasmuch as the law has provided two different definitions for both. 1. Section 2(e), Contract Act, 1872. 2. "A promise is defined as an accepted proposal. Section 2(b) says," a proposal, when accepted, becomes a promise." This is another way of saying that an agreement is an accepted proposal. The process of definitions comes down to this: a contract is an agreement; an agreement is a promise and a promise is an accepted proposal". See Dr. Avtar Singh, Law of Contract, (9th Ed.) P.3. 3. Singhal and Subrahmanyan's the Indian Contract Act (3rd Ed.) Vol-I, P.206. 4. Black's Law Dictionary (7th Ed.) P.67. 5. Samuel Williston, A treatise on the Law of Contracts. S.2, P.6(Walter H.E. Jaeger, 3rd Ed.1957) 6. Corpus Juris Secundum (Ed.1973) Vol.3, P.513. 7. Section 2(h), Contract Act, 1872. 8. Singhal and Subrahmanyan's the Indian Contract Act (3rd Ed.) Vol-1, P.206. 9. 2002 CLD 527; PLD 1999 Kar. 181; AIR 1998 SC.1400. 10. Samuel Williston, loc. cit. But these descriptions, if relied on conclusively, would leave certain significant question's to be un-answered. As for instance, if a contract is merely a kind of agreement, what sets "contract" apart from the rest of other kinds. If agreement is a first step towards the making of contract, what would be the nature of second step that takes the agreement into the realm of "contract". If all agreements are not contacts, then what are the qualifications of those agreements which merit to be contracts. A possible answer to these propositions, as frequently put forth by jurists and Courts of law, is the element of "enforceability at law". It is consistently maintained that only those agreements which are "enforceable by law" qualify to be contracts, therefore, the central line of distinction between them is the factor of "enforceability". This element is supported by the very litera legis, therefore, its rationality and correctness cannot be questioned. But for one who really aspires to comprehend this matter to the bottom of it, this answer is still incomplete and unsatisfying. A slightly deeper probe would compel one to ask "what makes the agreement enforceable by law"? This question undoubtedly points to the necessary qualifications and conditions which clothe an agreement with the element of "enforceability'. So as to transform the same into contract. It is often conceived that an agreement is enforceable by law if it possesses the qualifications set out in section 10 of the Contract Act, 1872, which goes, "All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration with a lawful object, and are not hereby expressly declared to be void." This gives an impression that the said conditions are the test of enforceability. But the above qualifications do not differentiate an agreement from a contract, for there are numerous agreements which duly possess the above qualifications but still they are not treated as contracts or "agreements enforceable by law". As far instance, two friends agree to go out for walk or to read a book together11; or to have dinner together. Now even if the "two friends" fulfil all the requirements of Section 10, as narrated above, their agreement would not be said to be enforceable by law. 11. Sir Frederick Pollock, Principles of Contract (10th Ed.) P.3. It follows that it is not section 10 of the Contract Act that renders an agreement enforceable at law so as to distinguish it from contract, but it is some thing else. What is that "something else, has been remarkably answered by some of the eminent jurists. As according to Sir John Salmond; "not every promise amounts to a contract. To constitute a contract there must be not merely a promise to do a certain act, but a promise, express or implied, to do this act as a legal duty. When I accept invitation to dine at another man's house, I make him a promise but enter into no contract with him. The reason is that our wills, though consenting, are not directed to the creation of any legal right...the essential form of a contract is not: I promise this to you; but I agree with you that henceforth you shall have a legal right to demand and receive this from me. Promises that are not reducible to this form are not contracts"12. G.H. Treitel Puts: "An agreement, though supported by consideration, is not binding as a contract if it was made without any intention of creating legal relation"13. In the words of Sir Frederick Pollock:" the agreement must be...an act in law: that is, it must on the face of the matter be capable of having legal effects. It must be concerned with duties and rights which can be dealt with by a Court of justice. And it must be the intention of parties that the matter in hand shall, if necessary, be so dealt with, or at least they must not have the contrary intention"14. Supreme Court of Pakistan expounded: "there is a difference between the contract and a promise as a valid contract creates obligation and is capable of enforcement in law"15. 12. P.J. Fitzgerald, Salmond on Jurisprudence (12th ED.) P.338. 13. G.H. Trietel, Trietel Law of Contract (8th Ed.) P.149. 14. Sir Frederick Pollock, Principles of Contract (10th Ed.)P.3. 15. PLD 2008 Supreme Court 146. Para 11, at page 153. As a necessary corollary to the above, it can be safely said that an agreement becomes enforcement by law (i.e. contract) only when it creates legal relationship, rights and obligations binding the parties to each other, and that this legal relationship is not created merely by law but by parties themselves. Parties, as Prof. John Salond holds, bind themselves legally. They can do so explicity or their intendment can be inferred from circumstances. In all cases there must exist what is called "animus contrahendi" from all parties. In short, it is the "intention" of parties that transforms a mere agreement into contract. It is real test of "enforceability at law". It is the "line" that distinguishes an agreement from contract. This is further corroborated by the fact that the intention to be legally bound may be nagatived by an express provision of the contract16. For instance, an agency agreement provided: "this arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law Courts...but is only a definite expression and record for the purpose and intention of the ....parties concerned, to which they each honourably pledge themselves." It was held that the agreement was not a (legally binding) contract as it was not intended to have this effect.17. The question of contractual intention is, however, one of fact and not of law. Therefore, the onus of proving that there was no such intention is on the party who asserts that no legal effect was intended, and the onus is heavy one18. Thus, the cardinal difference is the intention to create legal relationship. Rest of other differences are peripheral. 16. G.H. Trietel, Trietel Law of Contract (8th Ed.)P.150. 17. Rose and Frank Co. v. J.R. Cromption and Bros.Ltd (1925) A.C.445. 18. Edwards v. Skyways Ltd. (1964) L.W.L.R. 349, 355. Nevertheless, the following points of differences are worth mentioning. Statutory Essential Elements.--A mere agreement is the name of a promise or set of promises which amount to consideration for each other. Thus the only thing essential to reach an agreement is promise or promises by parties. Whereas, the essentials of a contract include an agreement made between at least two parties giving free consent, being competent to contract, for lawful object and consideration. It follows that to reach a mere agreement none of the above essentials is necessary but for an agreement to become a contract these are necessary. Remedies.---A mere agreement has no remedy for its breach. For instance, if A and B agree that ideology of Iqbal as to "sell" is true, but subsequently B denies its truthfulness, A has no legal remedy to bring B back to his first vision. Similarly, B agrees on A's intention to attend his dinner party. Later on, B does not attend the party. A cannot bring an action against him for breach of promise/agreement on ground that A has sustained monetary loss caused by excessive arrangement of meal in, anticipation of B's coming to dinner. Whilst, breach of a contract gives rise to a right of the aggrieved party to go to the Court of law and seek rescission of the contract,19 or get it specifically performed by the offending party through the order of Court.20. Apart there from, he can also pray for compensation in the form of special as well as general or punitive damages21. Injunction may also be sought to restrain the other party from breaching the contract22. Besides, if the contract is put to an end by rescission, the Court may order the parties (especially the one who rescinds) to restore or return benefits to each other that they may have respectively derived from the contract23. Right to seek judicial redress is the net effect of the element of "enforceability at law." 19. See sections 35-38 of the Specific Relief Act, 1877, and sections 62, 64 and 75 of the Contract Act, 1872. 20. See sections 12-30 of the Specific Relief Act, 1877. 21. See sections 73-75 of the Contract Act, 1872, and sections 19-20 of the Specific Relief Act, 1877. 22. See section 54 of the Specific Relief Act, 1877, and Order XXXIX Rule 2 of the Code of Civil Procedure, 1908. 23. See section 64-65 of the Contract Act, 1872, and Section 38 of the Specific Relief Act, 1877. Formalities.--Mere agreements are not required by law to be reduced into writing or registered in any manner. Whereas, some of the contracts are required by law to be not only written but also signed, attested by witnesses and registered with the concerned authority. Examples are sale deed24, exchange-deed25, and tenancy/lease-deed26. Voidability.--A contract may be voidable27 but an agreement is never so. However, an agreement may either be valid or void28. Even on this account a void agreement is divergent from a void contract. An agreement is said to be void where it is defective from the outset of the transaction; for instance, an agreement with minor is void at the time of its entering into. While, the adjective "void" is not ordinarily used with "contracts" because if a transaction bears the intention to create legal relation coupled with the qualifications of section 10 of the Contract Act, it cannot be prevented from being called a contract. Thus, it can never be void at its beginning. However, it may become void29 subsequently. For instance, due to destruction of subject-matter or subsequent impossibility. But if it is void from the beginning, it would be called a "void agreement" and not a "void contract." 24. See section 54 of the Transfer of Property Act, 1882. 25. See section 118 of the Transfer of Property Act, 1882. 26. See section 107 of the Transfer of Property Act, 1882 and sections 5, 6, 8 and 9of the Punjab Rented Premises Ordinance, 2007. 27. See section 2(j) of the Contract Act, 1872. 26. See section 2(g) of the Contract Act, 1872. 29. See section 65 of the Contract Act, 1872, where the words are, "When an agreement is discovered to be void, or when a contract becomes void." Apart from the distinctions, there are certain hybrid areas. To be more correct, there are certain types of contracts which are specifically referred as agreements in our country. Examples are agreement to sell, tenancy agreement (as mentioned in section 2(m) of the Punjab Rented Premises Ordinance, 2007) and arbitration agreement (as defined in section 2(a) of the Arbitration Act, 1940). In reality, these are not merely agreements but contracts for all intends and purposes, still they are termed, even by the very statute, as agreements. Many times, I have been anxiously striving to find out its reason but have never come up with an authentic answer except that all of them are executory types of contracts, and in our country executory contracts are loosely and generously called "agreements."