Differences between Agreement and Contract

The Supreme Court noted the approach taken by the Contracts Act 1950 to differentiate

between an agreement and a contract in Beca (Malaysia) Sdn Bhd v Tan Choong Kuang and

Anor [1986] 1 MLJ 390 as follow:

“It is useful to bear in mind the distinction between an agreement and a contract. The word

‘contract’ has at times been loosely used in the past. We do not see why we should perpetuate

such loose use of the words. The reason is simply that we are used to the English common law

which does not make the distinction between the two terms as does our Section 2 of the

Contracts Act.”

The following observation was then quoted from Pollock and Mulla on the Indian Contract

and Specific Relief Acts at page 54 by the Supreme Court:

“The distinction between `agreement' and `contract' made by sub-section (h) is apparently

original; it is convenient, and has been adopted by some English writers. The distinction is

apparent from Section 2. By clause (e) every promise and every set of promises forming the

consideration for each other is an agreement and by clause (h) an agreement enforceable by

law is a contract. By clause (g) an agreement not enforceable by law is said to be void...”

In this case, the Supreme Court referred to the sale and purchase transaction between the

purchaser and the house developer who possessed no license contravening the Housing

(Control and Licensing of Developers) Rules 1980 as a “provisional agreement” instead of a

“contract” as employed by the trial judge.

S. 2(e) of the Contracts Act 1950 (CA 1950) defines an agreement as “every promise and

every set of promises, forming the consideration for each other”. In other words, when mutual

promises are made by two parties to each other, an agreement is established. Nevertheless, not

all agreements can be enforced. According to S. 2(g) of the CA 1950, an agreement is said to
be void if it is not enforceable by law. On the other hand, an agreement which is enforceable

by law is known to be a contract as provided by S. 2(h) of the CA 1950.

S. 10(1) of the CA 1950 further emphasizes the difference between an agreement and a valid,

legally binding and enforceable contract, stating that “all agreements are contracts 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”.

Therefore, in order for an agreement to be a legally enforceable contract, three essential

requirements which are free consent, competency or capacity to contract, and lawfulness of

consideration and object must be fulfilled. An agreement can only be enforced when there is

lawful consideration and it is for a lawful purpose. Illegal transactions are strictly prohibited

by the law. A void agreement is defined in S. 2(g) of the CA 1950 as “an agreement not

enforceable by law”.

In Sulisen Sdn Bhd v Kerajaan Malaysia [2006] MLJU 341, a four-day programme namely

‘Program Pembangunan Rakan Rekreasi dan Rakan Cinta Alam’ was held by the defendant

via the Ministry of Youth and Sports at Taman Pertanian Malaysia. The question of which

company was the supplier of food and drinks to the participants and other tenting equipment

during the programme arose. It was argued by the plaintiff that his company was the designated

supplier for the programme. However, the defendant claimed that the designated supplier was

Darikha Enterprise as there was no document to demonstrate that the plaintiff had been

designated as the supplier. The issue of this case was whether acknowledgment of invoice and

delivery order sufficient to demonstrate the existence of contract between parties. It was held

by the High Court that the contract of which the plaintiff purported to exist was lack of the

essential elements of a contract. Firstly, consensus ad idem did not exist between the plaintiff

and the defendant. Secondly, the defendant issued the letters which showed the recipient was
awarded the contract to Darikha Enterprise and not the plaintiff, proving that the defendant had

no intention to create legal relation with the plaintiff. Thirdly, Darikha Enterprise had delivered

the goods to the defendant on the date as promised and the defendant had also made payment

to Darikha Enterprise, demonstrating that the promises of contracting parties were supported

by consideration. Therefore, Darikha Enterprise would be the lawful contracting party. Hj

Abdul Malik Ishak J stated that:

“The offer and acceptance when taken together would form the ‘agreement’ and that agreement

must be supported by consideration in order to establish the obligation. It is the parties that

must intend that the agreement to have legal force and the courts will only enforce what the

parties intend should be enforced. The parties too must agree on the same thing and this would

be known as mutuality. The parties too must have the capacity of reaching a binding agreement

and the subject matter must be legal.”

In Sri Kajang Rock Products Sdn Bhd v Mayban Finance Bhd and Ors [1992] 1 CLJ 204,

it was remarked by the High Court that:

“To constitute a valid contract there must be separate and definite parties thereto; those parties

must be in agreement, that is there must be a consensus ad idem; those parties must intend to

create legal relations in the sense that the promises of each side are to be enforceable simply

because they are contractual promises and the promises of each party must be supported by

consideration.”

The same principles were applied in Bekalan Sains P&C Sdn Bhd v Bank Bumiputra

Malaysia Bhd [2011] 5 MLJ 1 by Abdul Malik Ishak JCA who stated that offer, acceptance,

consideration, intention to be bound, mutuality, capacity and legality are the essential elements

in constituting any contract.

On top of that, S. 24 of the CA 1950 is the principal provision on agreements which sets out

the lawfulness of considerations and objects. According to this provision, a lawful

consideration or object of an agreement shall not be prohibited by law, be of such a nature that

it would defeat any law if permitted, be fraudulent, involve or imply injury to the person or

property of another, or be regarded by the court as immoral or opposed to public policy.