An agreement is regarded as a contract when it is enforceable by Law. Explain and illustrate”.

Topic: An agreement is regarded as a contract when it is enforceable by Law. Explain and illustrate”.

1.1 Introduction

We enter into contracts day after day. But a lot of people may not be aware of what are the essential elements required to make an enforceable contract. A contract[1] requires agreement[2] which the law will recognize. Taking a seat in a bus amounts to entering into a contract. When we put a coin in the slot of a weighing machine, we have entered into a contract. To go a restaurant and take snacks; we have entered into a contract. In such cases, we do not even realize that we are making a contract. This can called simple contract which does not require the agreement to be in any particular form. In the case of people engaged in trade, commerce and industry, they carry on business by entering into contracts.

An agreement is the understanding between two or more legally competent individuals or entities about the rights and duties regarding their past or future performances and consideration.

“An agreement is not always synonymous with a contract because it might lack an essential element of a contract, such as consideration”.[3]

And a contract is an agreement which gives rise to obligations which are recognized by law. “A contract may be defined as an agreement which legally binds the parties. The underlying theory is that a contract is the outcome of ‘consisting minds’. Parties are judge by what they have said, written or done.[4]

Agreement is the first essential element of contract. To determine whether or not an agreement has been reached, the courts will consider whether one party has made a firm offer[5] which the other party has accepted’.[6]

1.2 Contract

In law, a contract is a legally binding agreement between two or more parties which, if it contains the element of a valid legal agreement, is enforceable by law or by binding arbitration. A legally enforceable contract is an exchange of promise with specific legal remedies for breach. These can include compensatory remedy, whereby the defaulting party is required to pay monies that would otherwise have been exchange were the contract honored, or an Equitable remedy such as Specific Performance, In which the person who entered into the contract is required to carry out the specific action they have reneged upon.

According legal scholar Sir John William Salmond, a contract is “an agreement creating and defining the obligation between two or more parties”.[7]

“A contract is an agreement enforceable at law made between two or more persons by which rights are acquired by one or more to acts or forbearance on the part of the other or others”. [8]

1.3 Agreement

An agreement is a mutual understanding between two or more legally competent individuals or entities about their rights and regarding their past or future performance and consideration. While an agreement usually leads to a contract, it could be also be an executed sale, a gift or other transfer of property or a promise without a legal obligation.

However, there are some agreements which are not enforceable in a law court[9]. Such agreements do not give rise to contractual obligations and are not contracts.

Examples

(1)   A invites B for dinner in a restaurant. B accepts the invitation. On the appointed day, B goes to the restaurant. To his utter surprise A is not there. Or A is there but refuses to entertain B. B has no remedy against A. In case A is present in the restaurant but B fails to turn-up, then A has no remedy against B. it is not an ‘agreement’ as defined in Contract Act.

(2)   A gives a promise to his son to give him a pocket allowance of Taka one hundred every month. In case A fails or refuses to give his son the promised amount, his son has no remedy against A.

In the above examples promises are not enforceable at law as there was no intention to create legal obligations. Such agreements are social agreements which do not give rise to legal consequences. This shows that an agreement is a broader term than a contract. And, therefore, a contract is an agreement but an agreement is not necessarily a contract.

1.4 Difference Between Contract and Agreement:

Contract and Agreement both of this word describe the same thing. A contract defines the terms of agreement and an agreement defines the term of contract but yet there are unmistakable differences between the two.

The essential differences between a contract and an agreement are minor. In essence, a contract’s outline is more formal and more rigidly presented than the terms outlined in an agreement.

Contract –according to section 2(h) of the Indian contract actan agreement enforceable by law is a contract”. Hence every agreement and promise enforceable by law is a contract”.

An agreement may be legal or illegal. As it is not bound by the law it needs not to follow the rules. On the other hand only legally enforceable agreement is contract. So it can never be illegal.[10]

Agreement may be against of human rights. It will create no problem because the parties will not seek help from the law. A contract can never be against of human rights.

There is no obligation to write or register an agreement. Each and every contract must be written and registered.

Any two parties can make an agreement. But the parties of contract must be capable of contracting.

All agreements are not contract but all contracts are agreement.

A contract is a legally binding[11] agreement reached between two parties, the terms of which the courts have the authority and obligation to enforce. An agreement is a less formal creation of an obligation between the two parties.[12]

An agreement usually lacks one or more of the essential elements that are required to be present in order to form a valid contract that will be considered legally enforceable by a court[13] of law.

1.5 Essential Ingredients of a contract

As per Contract Act, an agreement enforceable by law is a contract.[14] Hence, we have to understand first the ingredients of a contract:

A contract consists of three ingredients:

  • an agreement[15]
  • a consideration[16]
  • an intention to create a legal relationship[17]

A contract can be described as a legally enforceable agreement. When ruling on contracts,courts look to identify an offer from one party, and the acceptance of that offer from the other party.

Every promise and every set of promises, forming the consideration for each other, is an agreement.[18] A person makes a proposal (offer). When it is accepted by other, it becomes a promise. However, promise cannot be one sided. Only a mutual promise forming consideration for each other is ‘agreement’. For example, A agrees to pay Tk 100 to B and B agrees to give him a book which is priced at Tk 100. This is set of promises which form consideration for each other. However, if A agrees to pay Tk 100 to B, but B does not promise anything, it is not ‘set of promises forming consideration for each other’ and hence not an agreement.

1.6 Legal Element of a Contract

The essential elements necessary to form a binding contract are usually described as:

• An Offer

• An Acceptance in strict compliance with the terms of the offer

• Legal Purpose/Objective

• Mutuality of Obligation – also known as the “meeting of the minds”

• Consideration

• Competent Parties[19]

  1. a. Offer

An offer is defined as the manifestation of the “willingness to enter into a bargain so made as to justify another person in understanding that his assent to the bargain is invited and will conclude it.”[20]

  1. b. Acceptance

Acceptance of an offer can occur in several ways: Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. An acceptance must not change the terms of an offer. If it does, the offer is rejected. A material change in a proposed contract constitutes a counteroffer, which must be accepted by the other party.[21]

  1. c. Legal Purpose

The objective of the contract must be for a legal purpose. For example, a contract for illegal distribution of drugs is not a binding contract because the purpose for which it exists is not legal.

  1. d. Mutuality of Obligation

This element is also known as the “meeting of the minds”. Mutuality of obligation refers to the parties’ mutual understanding and assent to the expression of their agreement. The parties must agree to the same thing, in the same sense, at the same time. The determination of a meeting of their minds, and thus offer and acceptance, is based on the objective standard of what the parties said and did and not their subjective state of mind. Unexpressed subjective intent is irrelevant. In determining whether mutual assent is present, the court looks to the communications between the parties and to the Acts and circumstances surrounding these communications. The offer must be clear and definite just as there must be a clear and definite acceptance of all terms contained in the offer.[22]

  1. e. Consideration

Consideration is an essential element of any valid contract. Consideration consists of either a benefit to the promisor or a detriment to the promisee.”Consideration is what each party brings to a contract. It is usually a promise in return for an act or another promise”.[23]

Consideration has been defined as: ‘A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’ Currie v Misa 1875

  1. f. Competent Parties

Parties to a contract must be competent and authorized to enter into a contract.

1.7 Void Agreement:

A void contract, also known as a void agreement, is not actually a contract. A void contract cannot be enforced by law. Void contracts are different from voidable contracts, which are contracts that may be (but not necessarily will be) nullified.[24]

Definition:

Literally: Void means having no legal value and agreement means Arrangement, promise or contract made with somebody. So, void agreement means an agreement that has no legal value.

Traditionally: An agreement not enforceable by law is said to be void”. Sec 2(g)

A void agreement has no legal effect. An agreement which does not satisfy the essential elements of contract confers no rights on any person and creates no obligation.

Example: An agreement made by a minor, agreement without consideration, certain agreement against public policy etc.

Agreement which become void:

An agreement, which was legal and enforceable it was entered in to, may subsequently become void due to impossibility of performance, change of law or other reason. When it becomes void the agreement ceases to have legal effect.

Expressly Declared Void Agreement

There are certain agreements, which are expressly declared to be void.

They are as follows:

  1. Agreement by a minor or a person of unsound mind. Sec (11)
  2. Agreement of which the consideration of object is unlawful. Sec (23)
  3. Agreement made under a bilateral mistake of fact material to the agreement. Sec (20)
  4. Agreement of which the consideration or subject is unlawful in part and the illegal part cannot be separated from the legal part. Sec(24)
  5. Agreement made, without consideration. Sec(25)
  6. Agreement in restraint of marriage. Sec( 26)
  7. Agreement in restraint of trade. Sec(27)
  8. Agreement in restraint of legal proceedings. Sec (28)
  9. Agreement the meaning of which is uncertain. Sec(29)

10.  Agreement by way of wager. Sec(30)

11.  Agreement contingent on impossible events. Sec (36)

12.  Agreement to do impossible acts. Sec(56)

1.8 Void Contract:

Definition

A void contract is one which has no legal effect whatsoever owing to the fact that a transaction which is void without any legal effect, it a misuse of term to call transaction a void contract. It may be called accurately a void transaction or a void agreement.[25]

Example:

1) A and B contract to marry each other. Before the lime fixed for the marriage, A goes mad. The contract becomes void.

2) A shopkeeper agrees to purchase stolen goods. The thief has no recourse at law because the agreement to purchase the goods was void as it assisted a thief to get the benefit or his crime.

1.9 Case Examples[26] :

a) Balfour v Balfour

Facts – Mr. Balfour was a civil engineer, and worked for the Government as the Director of Irrigation in Ceylon (now Sri Lanka). Mrs. Balfour was living with him. In 1915, they both came back to England during Mr. Balfour’s leave. But Mrs. Balfour got rheumatic arthritis. Her doctor advised her to stay, because a jungle climate was not conducive to her health. As Mr. Balfour’s boat was about to set sail, he promised her £30 a month until she came back to Ceylon. They drifted apart, and Mr. Balfour wrote saying it was better that they remain apart. In March 1918, Mrs. Balfour sued him to keep up with the monthly £30 payments. In July she got a decree nisi and in December she obtained an order for alimony.

The Court of Appeal unanimously held that there was no enforceable agreement, although the depth of their reasoning differed.

b) Parker v Clarke (1960)

Mrs. Parker was the niece of Mrs. Clarke. An agreement was made that the Parkers would sell their house and lives with the Clarkes. They would share the bills and the Clarkes would then leave the house to the Parkers. Mrs. Clarke wrote to the Parkers giving them the details of expenses and confirming the agreement. The Parkers sold their house and moved in. Mr. Clarke changed his will leaving the house to the Parkers. Later the couples fell out and the Parkers were asked to leave. They claimed damages for breach of contract.

It was held that the exchange of letters showed the two couples were serious and the agreement was intended to be legally binding because (1) the Parkers had sold their own home, and (2) Mr. Clarke changed his will. Therefore the Parkers were entitled to damages.

c)      Rose and Frank Co v Crompton [1923] Court of Appeal

Plaintiff based in New York and sold carbon paper – defendant an English manufacturer of it. After dealing with each other for a number of years they entered into a written agreement which said inter alia:[27]

Plaintiff claimed that defendant was in breach of the agreement and the trial judge held that it was legally binding. The Court said that for there to be legal agreements, an intention to be legally bound is essential – with business arrangements it usually follows as a matter of course that legal relations are intended. With social arrangements the reverse is the case.

There is no legal obstacle to prevent them from doing so – this means that there is no law and no issue of public policy against it. Once one reads the agreement in its ordinary meaning, then it is manifest that no action can be maintained on the basis of it.

However, once plaintiff actually ordered goods from defendant, then there would be a contract of sale in regard to that transaction. It could be argued then that this makes the agreement here rather like a tender to supply which does not have any contractual effect until an order is actually placed.

1.10 Conclusion

Contracts and agreements are created with the same purpose of creating a formal agreement between parties. Pollock defines contract as every agreement and promise enforceable at law is contract.

A contract is an agreement creating and stating responsibility between the parties. According to section 2b of the contract act, an agreement enforceable by law is contract. From the above definition of promise, it is obvious that an agreement is an accepted proposal. The two elements of an agreement are:

  • Offer or a proposal; and
  • An acceptance of that offer or proposal.

Thus, a contract consists of two elements:

  • An agreement; and
  • Legal obligation, i.e., it should be enforceable at law.

According to section 2e every promise and combination of promise making consideration for each other is an agreement. It is clear from the definition that promise is an agreement. Section 2 defines the promise as when any person with the suggestion is made indicate his assent thereto, it means the proposal is accepted. A proposal when accepted becomes promise. We can say that an agreement is an accepted proposal. The process of definition shows that a contract is an agreement, an agreement is a promise and a promise is an accepted proposal. An agreement therefore comes into existence only when one party makes a proposal of offer to the other and that other signifies his assent thereto. In short every agreement is the result of a proposal from one side and it’s acceptably by the other. If an agreement were not bound by the law, then it would not become a contract but would remain an agreement. However, when it only involves a personal understanding between persons and each of them inherently trust each other that they will come through with their promise, whether  it is written or not, such document is still an agreement, never a contract. Thus, with an agreement, there is never a legal guarantee for a reimbursement. When they are broken, there are no legal repercussions.

Bibliography

  1. 1. Geoff Monahan, BA, LLB, LLM, (2001), Essential Contract Law, 2nd Edition, University of Technology, Sydney.
  2. 2. CIMA; (2010/2011), Fundamentals of Ethics, Corporate Governance and Business Law.
  3. 3. Larry Mead, David Sagar ,(2006), CIMA Study Systems: Business Law, Edition: 2005/2006
  4. 4. Arun Kumar Sen and Jitendra Kumar Mitra,(2009-2010), Commercial Law and Industrial Law. The World Press Private Limited.
  5. 5. Routledge-Cavendish, (2006), Contract Law, 5th edition.
  6. 6. P C Tulsian, (2008), Business Law, 2nd Edition.
  7. 7. S. B. Marsh, J. Soulsby, (2002), Business law.
  8. 8. Donald L.Carper, Bill W.West, John A. Mckinsey,(2008), Understanding the Law, 5th Edition.
  9. 9. The  Indian Contract Act(ICA), 1872

10. Dr. Ashok Sharma, (2006-2007), Business Regulatory Framework , V.K (India) Enterprises.

11. Philip Davenport, Christina Harris, Unjust Enrichment, The Federation Press Pty Ltd.

12. Merriam-Webster online dictionary2008.

13. West’s Encyclopedia of American Law, (2008), edition 2.

14. Brian A. Blum, (2007), Contracts: examples & explanations, 4th Edition, Aspen publishers.

15. Shadwell v. Shadwell (1860) 9 C.B.N.S.

16. Business Law: CIMA Year One, http://www.economic-truth.co.uk by Tim Miller

17. http://www.lawyersnjurists.com/course-materials/business law/nsu/amu/essential-books/cima/terms-of-the-contract-cima/

18. http://www.lawyersnjurists.com/course-materials/business law/nsu/amu/essential-books/a-k-sen/commercial-law-and-industrial law/contract/chapter-4-void-and-voidable-agreements/

19. http://en.wikipedia.org/wiki/Contract

20. LAWS.COM, http://contract-law.laws.com/contract-law/contract-vs-agreement

21. law.com Law Dictionary,

22. http://www.lectlaw.com/def/c123.htm

23. http://www.dateyvs.com/gener03.htm

24. http://www.scribd.com/doc/40006981/When-Does-an-Agreement-Become-a-Contract

25. http://www.e-lawresources.co.uk/Offer-and-acceptance.php

26. http://netk.net.au/Contract/05Intention.asp

27. http://www.wgmorris.com/Articles/Its-the-Law-A-Contract-is-Unenforceable-Without-Mutual-Obligation.shtml

28. http://books.google.com/

[1] An agreement enforceable by law is a contract(Section 2(h) of Indian Contract Act 1872)

[2] An agreement is made when two people reach an understanding about a particular issue, including their obligations, duties, and rights by Nolo’s Plain-English Law dictionary.

[3] West’s Encyclopedia of American Law, edition 2, 2008

[4] Key term by CIMA; certificate Paper C5, page 67, 2010/2011.

[5] “An offer is a definite promise to be bound on specific terms”. CIMA; Fundamentals of Ethics, Corporate Governance and Business Law, page72, 2010/2011

[6] Key term by CIMA; Fundamentals of Ethics, Corporate Governance and Business Law, page 67, 2010/2011

[7]Commercial Law and Industrial Law by Arun Kumar Sen and Jitendra Kumar Mitra, Page: 14-20, 2009-2010

[8] Anson, Law of Contract.

[9] A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law. Walker, David (1980). The Oxford companion to law. Oxford: Oxford University Press. p.301

[10] Case: Archbolds v Spangletu, 1961

[11] An agreement will only be recognized as a contract if the parties intended that the agreement should be legally binding. With agreements of a friendly or domestic nature, this intention is rarely present. In fact, the law presumes that there is no such intention in the absence of strong evidence to the country. Therefore, an agreement between friends to meet for a meal, or between husband and wife for apportioning housekeeping duties, would not be legally binding contracts. CIMA Study Systems 2006: Business Law By Larry Mead, David Sagar, page-45, 2005/2006

[12] Trans-Lex.org: international principle

[13] A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law. Walker, David (1980). The Oxford companion to law. Oxford: Oxford University Press. p. 301. ISBN 019866110X.

[14] Indian Contract Act [section 2(h)].

[15] As already mentioned, to constitute a contract there must be an agreement. An agreement is composed of two elements—offer and acceptance. The party making the offer is known as the offeror, the party to whom the offer is made is known as the offeree. Thus, there are essentially to be two parties to an agreement. They both must be thinking of the same thing in the same sense. In other words, there must be consensus-ad-idem.

Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ for TK. 30, 00,000. ‘B’, an acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only car ‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the same. There is no contract because the contracting parties have not agreed on the same thing at the same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-ad-idem. Contract Law by Routledge-Cavendish, 5th edition,2006

[16] The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and is not enforceable at law. Moreover, the consideration must be real and lawful.

Say that A owed B money. If they agree to write off this debt, B has shown consideration (that is, he has forgone the money owed to him). A has not shown consideration – that is, he has not contributed anything. For a contract to be valid, both parties must show consideration. Business Law by P C Tulsian,chap-4, 2nd Edition.2008

[17] An agreement does not constitute a contract unless the parties to it intend their agreement to be enforceable by law. Often the context in which the contract is made shows whether or not the parties intended their agreement to be legally binding. It is usually that agreement made in a social context are not meant by the parties to be contracts, while agreements made in a business context are meant by the parties to be contracts.

In Balfour  v. Balfour(1919), a husband promised his wife an allowance before he left to take up a post abroad. When he stopped the payments, an action by the wife on the ground that this was not a binding contract but merely a domestic agreement with no legal obligation attached to it. Business law  By S. B. Marsh, J. Soulsby, p-108, 2002

[18] Indian Contract Act [section 2(e)].

[19] A person of legal age, without mental or other incapacity, is competent to enter into a contract. Understanding the Law by Donald L.Carper, Bill W.West, John A. Mckinsey. Page-374, 5th Edition, 2008.

[20] An offer does not have to be made to a particular person. It may be made to a class of persons or to the world at large, for example, as the offer of a reward for a lost item such as a cheque guarantee card, First Sport Ltd v Barclays Bank plc 1993.

[21] Acceptance may be defined as.’An unconditional positive act by a person to whom an offer has been made which brings a binding contract into effect.’ Key term by CIMA; certificate Paper C5, page 77, 2010/2011

[22] Contracts: examples & explanations By Brian A. Blum, Page-178, 4th Edition, 2007.

[23] CIMA; certificate Paper C5, page 80, 2010/2011

[24] Business Regulatory Framework by Dr. Ashok Sharma, page-77, 2006-2007

[25] Unjust enrichment By Philip Davenport, Christina Harris, page 72

[26]http://www.lawteacher.net/contract-law/cases/intention-cases.php

[27] “This agreement is not a formal or legal agreement. It will not be subject to the jurisdiction of either the British or American courts. It is a record of the intention of the parties to which they honourably pledge themselves and is to be carried out with mutual loyalty and friendly co-operation”.