The Contract Act is the law of those "agreements" which create "obligations" , and in case of a breach of a promise by one party to the agreement, the other has a legal remedy. Thus, a contract consists of two elements:
(i) an "agreement"; and
(ii) legal "obligation", i.e., it should be enforceable at law.
However, there are some agreements which are not enforceable in a law court. 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.
LAW OF CONTRACTS
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.
(2) A gives a promise to his son to give him a pocket allowance of Rupees 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.
What obligations are contractual in nature? We have seen above that the law of contracts is not the whole law of agreements.
Similarly, all legal obligations are not contractual in nature. A legal obligation having its source in an agreement only will give rise to a contract.
Example
A agrees to sell his motor bicycle to B for Rs. 5,000. The agreement gives rise to a legal obligation on the part of A to deliver the motor bicycle to B and on the part of B to pay Rs. 5,000 to A.
The agreement is a contract. If A does not deliver the motor bicycle, then B can go to a court of law and file a suit against A for non-performance of the promise on the part of A.
On the other hand, if A has already given the delivery of the motor bicycle and B refuses to make the payment of price, A can go to the court of law and file a suit against B for non-performance of promise.
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An obligation which does not have its origin in an agreement does not give rise to a contract. Some of such obligations are:
1. Torts or civil wrongs;
2. Quasi-contract;
3. Judgements of courts, i.e., Contracts of Records;
4. Relationship between husband and wife, trustee and beneficiary, i.e., status obligations.
These obligations are not contractual in nature, but are enforceable in a court of law.
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.”
Law of Contracts creates rights in personam as distinguished from rights in rem. Rights in rem are generally in regard to some property as for instance to recover land in an action of ejectment.
Such rights are available against the whole world. Rights in personam areagainst or in respect of a specific person and not against the world at large.
