Agreement vs. Contract: Understanding the Distinctions and Legal Implications
By Guest Post, published: 2023-07-05
Image by pressfoto on Freepik
All contracts are agreements, but not all agreements are contracts. And to make things more complicated, businesses and legal departments will use the word agreement to mean contract. So you might want to enter a contract with a new supplier, but at the meeting, everyone’s calling it an agreement.
Confusing, right? So how do you build good business relationships while legally protecting yourself at the same time? In this article, we’ll untangle the definitions of agreements vs. contracts, as well as the legal implications and uses of both.
What is an agreement?
An agreement is an informal promise between two or more parties to work toward a common goal. There are no legal implications to an agreement; agreements work on trust, not enforcement.
If one party doesn’t meet their obligations, the other parties have no legal recourse.
Agreements can work well between people who trust one another, like friends and family. They can also be the first step toward creating a contract. Two or more parties can enter an agreement to test the waters of their relationship before committing to a legally enforceable deal.
An agreement is a great way for parties to meet and discuss terms without either being legally on the hook for anything. Modern technology means that they don’t have to be physically in the same room; they can use Vonage video conferencing.
What is a contract?
A contract is an agreement between two or more parties that is legally binding. Generally, a legal department is involved with the drafting of a contract, often using law office case management software.
If one party doesn’t fulfill the requirements of the contract, there will be legal repercussions. They may be forced to fulfill their obligations or provide some sort of compensation.
But what makes a contract legally binding?
Requirements of a contract
Unlike an agreement, a contract has strict requirements. For a contract to be deemed legally enforceable, it must meet a few specifications.
- Identify: All parties must be identified and aware of the contract.
- Offer: An offer between parties is made. Requirements and terms are discussed and negotiated until both parties are happy.
- Acceptance: Both parties agree to the terms of the contract. If the contract is in writing, everything is signed.
- Consideration: In terms of a contract, consideration is a thing of value that each party must provide. That might be money, goods, labor, or any other tangible thing for exchange.
All parties must provide a consideration. If one party provides something and another doesn’t, that’s a gift or donation.
- Competency and capacity: Contracts require that all parties have the capacity to understand and meet the terms of a contract. For example, someone nefarious might have a person with limited mental capacity sign away the deed to their home. This is not enforceable because one party has a limited understanding of what they’re getting into.
- Legality: Theoretically, you could draw up a contract requiring someone to commit a crime. But no court of law would enforce the contract because its terms aren’t legal. All terms of any contract must fall within the confines of local law. As long as all of the above requirements are met, the contract is a legal document. A court can compel a non-compliant party to fulfill their obligations to the contract–or if that’s not possible, provide some kind of compensation.
Can I get that in writing?
Whilst it’s good practice to have all contracts in writing, it should be noted that it’s not a legal requirement for many. If you want to hire a freelancer, register a domain name, or adopt a pet, a verbal contract will suffice.
As long as all of the above requirements are met, an oral contract is just as enforceable as a written one–although much harder to prove.
There are a few exceptions, depending on your country or province. Generally, these are:
- Marriage contracts
- Property contracts
- Contracts for the sale of goods exceeding certain price points
- Contracts that are designed to last beyond a certain timeframe
- Contracts involving shares
It’s always worth looking into your local laws before choosing to forgo a written contract in favor of a verbal one. You don’t want to risk getting caught out.
Informal agreements can also be put into writing, especially if they discuss the potential for future business. But no requirements need to be met, since agreements are not legal documents.
Differences between an agreement and a contract
We’ve gone through the definitions of both agreement and contract, but let’s clearly lay out the differences.
|A formal agreement.||Much more casual.|
|Legally enforceable in court.||Not legally enforceable.|
|Terms and requirements are laid out in great detail.||Light on details. More of a discussion about common goals and potential terms.|
|Larger in scope.||Lighter in scope.|
|Meets all the requirements of a contract.||Doesn’t meet contract requirements.|
As we mentioned, many businesses and legal departments use the words contract and agreement interchangeably. In an ideal world, terms and requirements would be clear from the start and both parties would be aware of what they’re getting into.
But we don’t live in an ideal world. It’s important to do your research before you involve yourself in any sort of agreement.
Here are some things to consider before entering into any kind of agreement or contract.
Do you trust the parties involved?
Businesses frequently collaborate, and there are times when parties don’t know each other well enough to create a formal contract right out of the gate.
You might think you’re getting the best VoIP phone system cost, but how can you be sure?
This is a good time for an informal agreement–a getting to know you stage. Parties can meet and have discussions, feel each other out, and test the waters.
Does the agreement meet all of the legal requirements of a contract?
If you’re expecting to sign a contract, make sure all of the legal requirements are met. If they are, then sign away! If not, you might not be protected by the law if something goes wrong.
If you’re expecting an informal agreement, be very careful what you agree to; you might end up agreeing to a legally binding contract without meaning to. If you can’t meet the requirements of this contract, you could end up in legal trouble.
Essentially, take note of contract requirements and assess whether or not they’re being met. Then, make sure the assessment meets your expectations.
Do you require a contract or would an agreement suffice?
Contracts can be complex and take time to draft, negotiate, and agree on. They’re best crafted by a legal team to ensure that all the terms are properly outlined and the correct language is used.
That is to say, they can be a waste of time and resources if they’re not necessary.
If all the parties involved aren’t ready to commit, just want an informal discussion about future collaborations, or simply trust each other, a contract might not be the best course of action. An agreement can get the ball rolling.
If you want an agreement that provides you with transparency, detailed terms, and legal protection, then a contract is required.
Can you meet your responsibilities?
Since an agreement isn’t legally enforceable, there are no legal ramifications for failing to meet expectations.
Traditionally, though, agreements are often referred to as gentlemen’s agreements, so it’s good practice to try and stick to your word. If you’re fostering a future business relationship, an agreement might be the starting point, and you don’t want to sour that relationship from the start.
Going into a contract is far more serious. If you can’t meet the terms of your contract, you will end up in legal trouble. It’s best to use some kind of internal audit software to make sure you’re always meeting your responsibilities.
When considering a contract vs. an agreement, consider your responsibilities and make sure you can meet them–especially if entering into a contract.
Examples of when to use agreements vs. contracts
Imagine you’re searching for types of office phone systems for your business. You find a provider you like, but you’re not quite ready to commit.
You can have a meeting of the minds, where you and the provider come together for an informal discussion about a future business deal. The meeting doesn’t meet all the requirements of a legally binding contract, so it is an agreement.
You can walk away from this agreement at any time. If you find a better provider, you have no legal responsibility to the original provider to go into business. They cannot take you to court for failing to do business with them.
After some time, though, you decide to go with the original provider. Now it’s time for a contract. Your legal team can draft up a contract, and both parties can sign it. Now you’re in business! If the provider fails to meet your terms (in this case, the phone system you require), you have recourse to pursue legal action.
Agreement vs. contract?
There is a time and a place for both depending on the circumstances and relationships involved. This guide will help you choose the correct type of agreement to suit your needs, build your business, and legally protect yourself.