Although they may sound the same, there's a clear difference between a contract and an agreement in the legal context. An “agreement” is a mutual understanding between two or more parties, while a “contract” is a legally enforceable deal with specific terms and conditions.
When doing business transactions, renting an apartment, or hiring an employee, you enter into verbal or sometimes written agreements. When you put that agreement into paper with offer, acceptance, consideration, and intent to create legal relations, you make it a contract.
In that way, you can say agreements are like promises, but contracts are promises that involve a lawyer and a notary stamp!
Now in this post, we’ll make both terms more clear to you by breaking down their differences, various types, and how to choose which one fits your situation. So, don’t switch tabs just yet, here’s what you need to know.
What is an agreement?
An agreement is any mutual understanding or arrangement between two or more parties. It can be written, verbal, or even implied through actions. When you're shaking hands on a business deal, exchanging emails about a freelance project, or agreeing to keep something confidential, you're entering into an agreement.
Not all agreements are legally enforceable.
Unlike contracts, which require specific legal elements, agreements often rely on trust. For example, if you make a gentleman’s agreement with a friend to swap books monthly, but they stop participating, you likely have no legal recourse.
However, different jurisdictions interpret the term "agreement" differently. For example, in Washington, an agreement simply shows mutual assent. In Pennsylvania, an agreement is considered an enforceable contract, but only if its terms are clear and specific. In California, courts look at the intent behind an agreement to decide whether it is a final deal or just an "agreement to agree,” which is not legally binding.
Common types of agreements include a letter of intent, an MOU, or even a simple verbal promise to help a neighbor mow the lawn. However, since agreements aren’t legally binding by default, if one party fails to hold up their end, the other typically can’t take them to court.
What are some examples of agreements?
Here are the examples of five common agreement types and how they differ from contacts:
1. Memorandum of understanding (MOU)
An MOU, or Memorandum of Understanding, is a written agreement between parties outlining shared goals or future plans. It’s common in business partnerships and government deals. Unlike a contract, an MOU is not legally binding unless it includes specific contractual terms.
2. Letter of intent (LOI)
An LOI agreement happens when one party shows serious interest in a deal, like acquiring a company or forming a joint venture. It summarizes key terms before drafting a contract. Difference? It’s usually non-binding, meaning either party can walk away without legal consequences. There’s no guarantee the deal will happen.
3. Gentlemen’s agreement
This is a handshake deal based on trust, no lawyers, no paperwork. Think of two businesses agreeing to refer clients to each other. Difference? It’s informal and lacks legal enforceability. If one party fails to deliver, the other can’t take them to court.
4. Verbal agreements
Ever agreed to lend a friend money with just a promise? That’s a verbal agreement. While some verbal agreements can be contracts, they’re hard to prove in court. If there’s a dispute, it’s your word against theirs.
5. Employee offer letter
An initial offer letter outlines proposed employment terms like salary, start date, and job responsibilities. While it expresses intent to form an employment relationship, it's typically not binding until both parties sign a formal employment contract.
What is a contract?
Like an agreement, a contract is a formal arrangement between two or more parties to do (or not do) something. But here’s the big difference— contracts are always legally enforceable. That means if someone breaks the terms, the other party can seek legal action, either through court or arbitration.
A contract is valid only if it contains all the required elements and when all parties accept the terms, typically by signing it. Unlike agreements, contracts involve “consideration,” which is something of value exchanged between the parties (usually money but can also be goods or services). For a contract to hold up in court, it must include these essential elements:
- Offer
- Acceptance
- Mutual assent (Meeting of minds)
- Consideration
- Capacity to contract
- Legality
If any essential element is missing, the document might still be a useful agreement, but it won’t hold up as a contract in a legal dispute. For example, A sales contract is binding because it includes an offer (the product), consideration (the payment), and agreement on terms (delivery, warranty, and product specifications), sealed with signatures (proving mutual acceptance).
On the other hand, if you and a friend verbally agree to start a business together but don’t define responsibilities or financial commitments, it’s just an informal agreement, not a contract.
Contracts offer legal protection, but they also come with risks if not properly drafted. If the contract is vague, courts may refuse to enforce it or interpret it in an unintended way. Also, if one party doesn’t fulfill their end of the bargain, the other party can take legal action.
If the parties are in different states or countries, disputes may arise over which laws apply. Contracts should clearly state which jurisdiction will handle legal issues. Most importantly, contracts must be in writing and include a wet-ink eSignature or digital signature to be enforceable.
What are some examples of contracts?
Agreements are great for flexibility, but if you want legal protection, a contract is the safer option. Let’s look at five common types of contracts and how they work.
1. Non-disclosure agreement
Though it has "agreement" in its name, NDAs or Non-Disclosure Agreements are typically written documents that can be legally enforced in court. NDA ensures that confidential information like trade secrets or business strategies stays protected. Unlike a general agreement, an NDA has legal consequences if breached. It often requires signatures, has clear legal obligations, and specifies damages or remedies if broken.
2. Employment contracts
A job offer is an agreement, but once you sign an employment agreement, it becomes a legally binding contract. It includes salary, job role, benefits, and termination clauses. If an employer wrongfully fires an employee or the employee violates company policies, legal action can follow.
3. Service agreements
IT teams, marketing agencies, construction, procurement teams, or freelancers often work under service contracts. These outline deliverables, payment terms, and deadlines. Unlike a handshake deal, a written contract ensures both parties are legally bound. If one side fails, the other can demand performance or compensation.
4. Real estate contracts
Buying or renting a property isn’t just a mutual understanding, it’s a formal contract with legal weight. Real estate contracts detail prices, ownership rights, and obligations. If a buyer backs out after signing, the seller can pursue legal action or keep the deposit.
5. Sales and purchase agreements
Businesses selling products or software licenses use Sales and purchase agreements. Unlike a verbal agreement to buy something, this contract locks in obligations—like product warranties, refund policies, or payment schedules. If a company fails to deliver, the buyer can sue for breach of contract.
Key differences between agreement and contract
An agreement is a mutual understanding or arrangement between two or more parties regarding a particular matter. It involves the meeting of minds, where parties reach a consensus on the terms and conditions of their arrangement. Some common examples include roommate agreements, and service agreements.
Some key characteristics of agreements are that parties willingly agree to the terms, they can be oral or written, terms can be negotiated and adjusted, and there are fewer requirements compared to contracts.
A contract is a legally binding agreement between two or more parties that establishes their rights, obligations, and remedies. It is a formal document that outlines the terms and conditions that the parties have agreed upon. Contracts are classified into different types based on their nature, such as expressed contracts, implied contracts, unilateral contracts, bilateral contracts, and more.
For a contract to be considered valid, one party must make an offer, and the other must accept it, creating a mutual agreement. Each party must provide something of value as part of the contract, such as money, goods, or services. The parties entering the contract must have the legal capacity to do so, meaning they must be of legal age and mentally competent. The contract must be for a lawful purpose and not involve illegal activities.
Now let’s compare agreement and contract to understand their differences
1. Formation: How agreements and contracts are created
The formation of agreements and contracts differs in the way they are established. Agreements can be formed through mutual understanding and consent between parties, often through informal means such as verbal communication or simple exchanges.
On the other hand, contracts require a more formal process. They are typically created through an offer and acceptance, where one party proposes, and the other agrees to it, resulting in a binding contract.
2. Legal requirements: Level of formality and specificity
Agreements are generally less formal than contracts. They can be informal and do not always require a written document to be valid, although having a written agreement helps in clarity and evidence.
Contracts, on the other hand, often require more formalities. They must meet certain legal requirements, such as being in writing, clearly outlining the terms and conditions, and being signed by all parties involved. Contracts are typically more detailed and specific in their terms, leaving less room for interpretation or ambiguity.
3. Enforceability: The extent to which agreements and contracts are legally binding
One significant difference between agreements and contracts lies in their enforceability. While both agreements and contracts can be legally binding, contracts generally have more legal weight and enforceability.
Contracts offer stronger legal protections because they involve more formalities, clear terms, and consideration between parties. Agreements, especially informal or oral ones, may be more challenging to enforce, as they often rely on the parties' trust and good faith.
4. Remedies for breach: Available options when one party fails to fulfill their obligations
When a party fails to fulfill their obligations in a contract, the other party has legal remedies available. These remedies may include seeking damages, specific performance (requiring the breaching party to fulfill their obligations), or contract termination.
Agreements, especially informal ones, may not have the same level of legal remedies available in case of breach. However, parties can still seek resolution through negotiation, mediation, or informal dispute resolution methods.
5. Parties’ intentions: How agreements and contracts reflect the parties’ intentions
Agreements and contracts also differ in terms of how they reflect the parties’ intentions. Agreements are often more flexible and can be tailored to suit the specific needs and intentions of the parties involved. They can be informal and based on trust and understanding between the parties.
Contracts, on the other hand, are more structured and formal, aiming to ensure clarity, accountability, and legal enforceability. Contracts are designed to protect the parties’ interests and intentions by clearly outlining the rights, obligations, and expectations of each party.
6. Examples: What types of documents are agreements and contracts
Examples of agreements include handshake deals, informal arrangements, or non-binding letters of intent. Roommate agreement, service agreement are some examples of Agreements.
In contrast, examples of contracts include employment contracts, lease agreements, sales contracts, or construction contracts. These examples highlight the varying degrees of formality, specificity, and enforceability between agreements and contracts in different contexts.
Real-life examples of contracts and agreements
Examples that demonstrate agreements in action
Imagine you’re moving into a new apartment and decide to share it with a roommate. Before you move in together, you sit down and have a friendly discussion about the rules and responsibilities. You agree on things like splitting the rent, dividing household chores, and establishing quiet hours. This verbal understanding between you and your roommate forms an agreement, allowing both of you to live harmoniously and hold each other accountable.
Another example of an agreement can be seen when hiring a freelance graphic designer for a project. You discuss the project requirements, timelines, and compensation over email or a phone call. Once you both agree on the scope of work and the fee, you proceed with the project based on this mutual understanding. This informal agreement serves as a foundation for the working relationship between you and the designer.
Examples that showcase contracts in action
Imagine you’re starting a new job at a company. Before you officially begin working, you’re presented with an employment contract that outlines your job title, salary, benefits, working hours, and other important terms and conditions. This written contract ensures that both you and the company have a clear understanding of your employment relationship and protects the rights and obligations of both parties.
Another example of a contract can be seen when buying a car from a dealership. You and the seller negotiate the price, warranty, and additional terms. Once you reach an agreement, you sign a written sales contract with all the agreed-upon details. This contract protects both the buyer and the seller by setting out the transaction terms and providing legal recourse if any issues arise.
Differences between agreements and contracts in the examples
Agreements are often more casual and based on mutual understanding, while contracts are more formal and typically involve written documentation. Agreements rely on trust and goodwill between parties, whereas contracts provide legal protection and enforceability. While agreements offer flexibility and are open to interpretation, contracts provide specificity and clarity regarding the terms and obligations.
Understanding these differences helps us navigate various situations in life and make informed decisions. Whether it’s a friendly agreement with a roommate or a formal contract for an important business transaction, being aware of the distinctions can ensure that our rights and responsibilities are properly addressed.
Choosing the right approach: Agreement or contract
When entering into a legal arrangement, it’s important to consider whether an agreement or a contract is the appropriate choice. Here are some factors to consider when deciding between the two:
Factors to consider when deciding between an agreement and a contract
- Complexity of the arrangement: If the arrangement is straightforward and requires minimal detail, an agreement might be sufficient. However, if the arrangement is complex, involves substantial obligations, or requires specific terms and conditions, a contract is usually more appropriate.
- Legal enforceability: Consider the level of legal enforceability you need. If the arrangement involves significant financial transactions or potential risks, a contract provides stronger legal protections and enforceability than an informal agreement.
- Relationship dynamics: Assess the nature of the relationship between the parties involved. If there is a high level of trust, goodwill, and ongoing collaboration, an agreement may be more suitable. On the other hand, if the relationship is more formal, business-oriented, or involves potential disputes, a contract offers clearer guidelines and legal remedies.
Scenarios where agreements are preferable
- Personal or informal arrangements: For everyday situations like sharing household chores with a roommate or borrowing a friend’s bicycle, an informal agreement can suffice. These agreements rely on mutual trust and are more flexible and adaptable to changing circumstances.
- Small-scale or low-risk transactions: When engaging in minor transactions, such as buying a small item from a local seller, an agreement can establish the terms without complex legal documentation.
- Collaborative projects: In creative collaborations, volunteer initiatives, or non-profit activities, agreements based on trust and shared goals often foster a more cooperative and flexible environment.
Scenarios where contracts are necessary
- Business relationships: When entering into a professional relationship, such as hiring an employee, partnering with a vendor, or securing a business loan, contracts are crucial. They provide legal protection, clearly define rights and responsibilities, and offer remedies in case of a breach.
- High-value transactions: For significant financial transactions like real estate purchases, large investments, or long-term service contracts, contracts ensure that all parties understand and agree to the terms, reducing the risk of misunderstandings or disputes.
- Regulated industries: In regulated industries, such as healthcare, construction, or finance, contracts are often required to comply with legal and regulatory standards. These contracts outline specific obligations and responsibilities to ensure compliance and accountability.
Ultimately, the choice between an agreement and a contract depends on the specific circumstances, level of formality required, and the desired legal protections. Assessing the factors involved will help determine the most suitable approach for the particular situation, ensuring that the rights and obligations of all parties are properly addressed.
What make an agreement legally binding?
By following these steps and incorporating additional elements, agreements can be transformed into legally binding contracts that offer clarity, protection, and enforceability for all parties involved.
To turn an agreement into a legally binding contract, the following steps can be followed:
- Offer and acceptance: Ensure both parties express their intent clearly. One party makes an offer with specific terms, and the other accepts without modifications.
- Consideration: Introduce valuable exchange between parties, such as money, goods, services, or promises. This ensures both parties receive a benefit or incur a detriment.
- Legal capacity: Ensure both parties have the legal capacity to enter into a contract, including being of legal age, mentally competent, and not under undue influence.
- Formalize the agreement: Transform the agreement into a written document. Include essential terms like involved parties, subject matter, payment terms, obligations, warranties, and guarantees.
- Signature: Both parties should sign the contract to demonstrate agreement and consent. This establishes clear evidence of their intention and ensures enforceability.
To strengthen the contract and address potential issues, consider the following elements:
- Remedies for breach: Determine available remedies in case of a breach, such as monetary damages, specific performance, or contract termination. Clearly outlining remedies protects parties’ interests and facilitates dispute resolution.
- Boilerplate clauses: Include standardized provisions like dispute resolution mechanisms (arbitration or mediation), choice of law, force majeure, entire agreement, and severability. These clauses address common contractual considerations.
- Jurisdiction: Specify the governing jurisdiction or legal system for contract interpretation and enforcement. This clarifies applicable laws in case of disputes and minimizes conflicts regarding the legal framework.
5 Different types of contracts
You can classify contracts based on their formation, enforceability, obligations, and conditions. Understanding these different types of contracts can help you protect your interests. Let’s break them down into five groups.
1. Express and implied contracts
Express contracts: These are clearly stated agreements, written or spoken, where both parties explicitly agree to terms (e.g., a signed employment contract).
Implied contracts: These arise from actions rather than direct communication. For example, you visit a doctor, and by receiving treatment, you’re expected to pay—even if nothing was signed.
2. Unilateral and bilateral contracts
Unilateral contracts: One party makes a promise that’s only fulfilled if the other party takes a specific action. For example, someone offers a $500 reward for finding a lost wallet.
Bilateral contracts: This is the most common type of contract where both parties exchange promises and are legally bound to fulfill them. For example, a business signs a contract with a web designer to build a website for $5,000. The business must pay, and the designer must complete the work.
3. Executed and executory contracts
Executed contracts: These contracts are fully completed and all obligations have been met by both parties. For example, a company purchases new laptops from a vendor, pays for them, and receives delivery. Since both sides have fulfilled their obligations, the contract is considered executed and legally settled.
Executory contracts: These contracts still have pending obligations and remain executory. For example, an ongoing subscription where payments are made monthly.
4. Formal and informal contracts
Formal contracts: These contracts must meet specific legal criteria to be valid, such as being notarized, signed under seal, or documented in a certain format. For instance, a commercial lease agreement requires official documentation, legal verification, and signatures from all involved parties to be enforceable in court.
Informal contracts: These agreements don’t require strict legal formalities and can be verbal or written. For example, if a startup hires a freelance graphic designer through an email agreement, it’s still a valid contract, even without formal legal documentation. However, informal contracts can be harder to enforce in disputes.
5. Conditional and unconditional contracts
Conditional contracts: These agreements are only binding if specific conditions are met. For example, a company agrees to buy cybersecurity software, but the deal is contingent on the software passing a security audit. If the audit fails, the contract is void. These contracts protect parties from uncertain outcomes.
Unconditional contracts: They’re legally binding with no extra conditions. Once signed, both parties must follow through.
How to choose the right type of contract?
Contracts provide clarity, security, and legal backing, which makes them a safer option than simple agreements. If you’re entering into any significant business or financial arrangement, here’s how to make an informed decision.
- Think about the nature, complexity, and value of the transaction. If it’s a straightforward deal, an informal or bilateral contract might work. But if you're entering a high-value partnership, a formal contract with clear terms is best.
- Some contracts, like real estate deals and business partnerships, require specific legal structures and formal documentation. For example, under the UETA and ESIGN Act, electronic contracts and signatures are legally valid in most business transactions. However, some contracts, like wills, still require physical signatures. So, check your local regulations to ensure compliance, or better yet, get a lawyer’s opinion.
- If circumstances may change, consider a conditional contract that allows modifications based on predefined terms. If both parties want immediate clarity, an unconditional or executed contract might be better.
- Venturing into a long-term collaboration? A bilateral contract with clear obligations is ideal. A one-time service? An implied or informal contract might work. The stronger the relationship, the more flexibility you have.
- For high-stakes agreements, like business acquisitions or large-scale service contracts, consulting a legal expert ensures you don’t overlook critical terms or potential risks.
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