Was there a time when you thought a contract had the same scope as an agreement and vice versa? If you do, we’re telling you now that they aren’t and it’s better to immediately correct such misconceptions because you may fall victim to your lack of knowledge on the distinction of these two terms.
Although “contract” and “agreement” are frequently used interchangeably, they have very different meanings in the law. Unlike a commercial agreement, which is more official and binding and must be documented, an informal agreement does not require witnesses or writing down.
Defining Agreement And Contract
Agreements and contracts are formal declarations of the terms of a deal between two or more parties. The two most distinguishing legal purposes and features are their adaptability and application.
Contracts are agreements, but not all agreements are contracts. An agreement and contract can be either verbal or written, but a written contract is always enforceable if it contains certain provisions.
Let’s dive in and define agreement and contract.
What is an Agreement?
An agreement is less strict and they may fall short of being an enforceable contract. They merely consist of a mutual understanding or arrangement between two or more people. Typically, agreements are verbal, but this does not exclude them from being legally enforceable.
However, the trouble with a verbal agreement is that they don’t necessarily carry legal implications. And so, if one side wishes to withdraw from the contract and denies that such a conversation occurred, nothing compels the parties to adhere to the conditions. Instead, they rely on all parties involved to abide by the agreement. People might make honest errors if they need to remember what was agreed upon if the agreement occurred some time ago.
If two parties have built confidence and trust, a non-contractual arrangement can save time and money while providing greater flexibility.
Benefits of agreement:
- Quick & easy
- Informal
- Flexible in nature
In other words, an agreement is formed when one party promises to perform or refrain from doing something in exchange for compensation.
What is a Contract?
Contracts are formal, enforceable agreements with mutual consent from all parties involved. They are a written instrument outlining both parties’ obligations, responsibilities, and commitments. It is a mechanism to remember what was agreed upon, especially in complex transactions, and it protects all parties if something goes wrong.
They can be used as supporting evidence if one of the entities fails to comply with the requirements. If a party breaches the contract or fails to fulfill its obligations, the other party may pursue legal action.
To make a legally binding contract, it must contain all the elements listed below:
- Consensus, or “a meeting of the minds”
- Proposal and acceptance
- Consideration
- The ability to contract.
- The validity of a contract.
The conditions of mutual assent and offer and acceptance are comparable to those of an agreement. Consideration indicates that the transaction is made in exchange for sufficient remuneration. A prime illustration is an employment contract. The worker agrees to perform a given job for a specified amount of remuneration.
Benefits of a contract:
- Legal and binding
- There is evidence
- Minimizes risk and disputes
- Can be done quickly with a template or an online portal
- Explains the terms and who is responsible for what.
Examples of Agreement vs. Contract
In order to better understand what agreements and contracts are, we have included a few examples below.
Examples of Contracts
Many legal papers that are called agreements are actually contracts. So that their names don’t mislead you, below are some samples of standard business contracts:
1. General Business Contracts
A “general business contract” is a legally binding agreement between two parties within a company. That is to say, the following contracts are used to organize the terms and how a firm will run when it is being structured into the following.
- Partnership agreement- It is a partnership agreement that involves not only what each partner will bring to the table but it also states the relationship between partners and their stakes in a company.
- Property and equipment lease- This contract involves a lease period for a property or piece of equipment, as well as payment terms, conditions, and other provisions.
- Non-disclosure agreement- is a relatively frequent contract that allows organizations to prevent the disclosure of sensitive information by requiring third parties to agree that they would face legal consequences if they disclose the information.
2. Bill Of Sale
In situations when this type of information may be required, owners often utilize a Bill of Sale to demonstrate their ownership of a particular property. This sort of contract specifies, among other facts, the parties involved, who is selling and who will be the new owner of the personal property, and how much the contract is for.
3. Employment Contract
An employment contract is a legally binding agreement between an employer and an employee that details both parties’ legal rights and obligations.
4. Licensing Agreement
With a license agreement, the creator or owner of a product (or idea, service, software, etc.) can grant permission to third parties to use their products in exchange for financial compensation, such as a cut of the profits. Licensing agreements are essential for these owners who wish to allow other firms to utilize their “product” while still receiving reasonable compensation and regulating its usage.
5. Promissory Note
A typical example of a negotiable instrument is a student loan, in which a private lender swaps tuition money for just a student in return for an offer of the same products (contract) that the student would repay the loan. The agreement will explain the payment terms, including the time the learner has to repay the loan and any associated fees.
Examples Of Agreement
There are a number of different types of agreement in the business world. For instance, a non-disclosure agreement is utilized by businesses that interact with prospective workers, clients, or vendors and must preserve personal and private information. The opposing party may pursue legal action if the signatory of the non-disclosure agreement discloses any of the secret information.
Prenuptial Agreement
It is an agreement between two people who are getting married that outlines the terms and conditions of the marriage, including issues such as property ownership, financial responsibilities, and decision-making authority.
Service agreement
It is a contract between a service provider and a client that outlines the terms and conditions of the service being provided, including the scope of the work, the payment terms, and the duration of the agreement.
Confidentiality agreement
It is a contract between two parties that outlines the terms and conditions under which confidential information will be shared and used and each party’s obligations with respect to protecting the confidentiality of the information.
Why Should I Need a Contract Instead of an Agreement?
Written contracts offer more clarity and security.
The primary cause of the failure of many verbal agreements is that parties change, memories fade, and one person’s version of events frequently differs from another’s.
Implicit agreements are insufficient when a debate involves company strategies, duties, and money management. Putting agreements in writing permits all parties to assess how the other parties interpret their agreement. A written contract identifies a point of contention or ambiguity, so parties can discuss and negotiate that point before committing to the transaction.
A contract lessens conflict and difficulty.
A contract may not eliminate the possibility of conflict, but it can lessen its impact. There are several ways in which a contract can serve to safeguard you in the event of a disagreement. It’s preferable to avoid costly litigation fees and pursue alternative dispute resolution methods like mediation if your client doesn’t participate, and a contract can help you do just that. This contract is legally binding, so if mediation fails, you can rely on its terms to help you in court or when trying to collect a debt.
Are All Agreements Contracts?
The key distinction between an agreement and a contract is that the former is not legally binding but the latter is. The sole condition for an agreement is that all parties understand their rights and duties, while a contract includes explicit rules and regulations that can be enforced by law.
For instance, a roommate’s agreement to take out the trash every other week or a friend’s invitation to supper are two informal agreements. No legal action can be taken against you if you fail to fulfill your obligations under this agreement.
Final Thoughts
Contracts and agreements reflect the parties’ rights, responsibilities, and obligations. An effective contract will explain each party’s tasks, how to perform them, what to measure them against, and when. Thus, contracts help parties remember their obligations and rights. Moreover, businesses can reduce risk by utilizing contracts to foresee and clarify who is responsible for what and on what terms.
