We find that a contract essentially consists of two elements:
(1) an agreement,
(2) Legal obligation i. e., a duty enforceable by law. We shall now examine these elements in detail.
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1. Agreement:
As per Section 2(e): “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. What is a ‘promise’?
The answer to this question is contained in Section 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. In short, an agreement is the sum total of offer’ and ‘acceptance’.
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On analysing the above definition the following characteristics of an agreement become evident:
(a) Plurality of persons:
There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself.
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(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 legal obligation i.e., a duty enforceable by law. 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. “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 duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences.
In business agreements the presumption is usually that the parties intend to create legal relations. Thus an agreement to buy certain specific goods at an agreed price e.g., 100 bags of wheat at Rs 1430 per bag is a contract because it gives rise to a duty enforceable by law, and in case of default on the part of either party an action for breach of contract could be enforced through a court provided other essential elements of a valid contract as laid down in Section 10 are present, namely, if the contract was made by free consent of the parties competent to contract, for lawful consideration and with a lawful object.
Thus it may be concluded that the Act restricts the use of the word ‘contract’ to only those agreements which give rise to legal obligations between the parties.
It will be appropriate to point out here that the law of contract deals only with such legal obligations which spring from agreements. Obligations which are not contractual in nature are outside the purview of the law of contract.
For example, obligation to maintain wife and children (status obligation), obligation to observe the laws of the land, and obligation to comply with the orders of a court of law do not fall within the scope of the Contract Act.
Salmond has rightly observed: “The law of contracts is not the whole law of agreements, nor is it the whole law of obligations. It is the law of those agreements which create obligations, and those obligations, which have their source in agreements”.