For the illustration of above mentioned statement we need clear concept about contract and agreement. If we clear the concept about contract and agreement, we can easily say that, “All contracts are agreement, but all agreements are not contracts”.
The ContractAct, 1872, provides the definition of contract. According to section 2 (h) of the Contract Act, 1872, “An agreement enforceable by law is a contract.”
If we analyze the definition of the contract mentioned above, we get two fundamental characteristics or features, viz.-
(i) Agreement between the parties and
(ii) This agreement must be enforced by law.
So agreement is the first step of contract. But after making agreement, it may be enforceable by law or may not be enforceable at law. If that agreement is enforced by law then it will be treated or turned into contract, But if the agreement is not enforced by law that will not be treated as a contract but merely an agreement. So all contracts are agreement, but all agreements are not contract.
For example: - A minor “X” has agreed to sell an apartment that he has inherited to his father, to another person named “Y”. Here, this will be called agreement but not a contract. Because according to the law of contract, a minor is not capable of entering into a contract. So this agreement is not enforced by law. But from the definition of contract we know- every agreement enforced at law is a contract. So, all contracts are agreement but all agreements are not contract.
Unlawful consideration may create agreement but not a contract:-
Section 2(e) provides that- every promise and every set of promises, forming consideration for each other, is an agreement.
Apart from this, section 2(a) and 2(b) provides that “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.” And when the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted. A proposal, when accepted becomes a promise. The person who making the proposal is called- “promisor” and the person accepting the proposal called “promise”.
Section 2 (d) provides the definition of consideration. According to this section the definition of consideration is as follows:-
“When, at the desire of the promisor, the promise or any other party/person has done or abstained from doing, or does or abstains from doing, or promise to do or to abstain from doing, something such act or abstinence or promise is called a consideration for the promise”.
But if under section 23 of the Contract Act, such consideration is forbidden by law, if, is of such a nature that, if permitted, it would defeat the provision of any law, or, is fraudulent; or
Involves or implies injury to the person or property of other, or the Courts regards it as immoral; or opposed to public policy.
In these cases, the consideration or the object of the agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. So in agreement the consideration may be unlawful. But in a contract that consideration must be lawful. From this view point it can be said that- all agreement are not contract.
Further more, what agreements are contracts it is said in section 10, that- All agreements are contract if they are made by the free consent of parties, competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. So one of the fundamental elements of contract is consideration and which must be lawful.
In order to make a contract, the first and main step is agreement which must be constituted through lawful consideration. This agreement does not crate any duties and obligation. In order to create right, duties or obligation the following extra elements are needed-
(i) Capacity of the parties/Competent to contract: According to section 11, every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
(ii) Free consent of the parties: According to section-14, consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation and mistake.
(iii) Lawful object: The object of the contract must be lawful. Object must not be illegal, immoral or opposed to public policy. Contract is not valid if it is illegal, immoral or opposed to public policy.
(iv) Contract is not prohibited by law: Contract will not be prohibited by the existing law. Because such kind of contract has no/ will not have legal effect.
After the above discussion, it is found that the first and main condition of valid contract is lawful agreement. If the above mentioned elements exist in a lawful agreement, then that agreement turned into a contract. In the absence of above elements or in the presence of defective elements (i.e. unlawful consideration/unlawful object) illegal or void contract can be formed/ constituted. But illegal or void contract has no legal status/existence, they are proper to say illegal or void agreements.