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.

I shall give you a very simple example to explain this point.

An agreement to sell a car may be a contract but an agreement to go for lunch may be a mere agreement not enforceable by law. Thus all agreements are not contracts. 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., 200 bags of rice at Rs.100 per bag is a contract because it gives rise to a duty enforceable by law, and in case of default through a court provided other essential elements of a contract was made by free consent of the parties competent to contract, for a 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 arise form agreements, obligations which are not contractual in nature are
outside the purview of the law of contract.

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