Difference Between Agreement and Contract

In the world of legal terminology, the terms “agreement” and “contract” are often used interchangeably. While contracts and agreements share similarities, they also have distinct differences that can impact their legal implications. Understanding these differences is crucial, whether you’re entering into a business partnership, signing a lease agreement, or engaging in any other form of legal commitment. In this article, we will explore the nuances between agreements and contracts, focusing on their definitions, legal significance, and practical examples.

What is an Agreement?

An agreement, in its most basic form, refers to a mutual understanding between two or more parties regarding a specific matter. It can be verbal or written, informal or formal. An agreement outlines the rights, obligations, and responsibilities of the parties involved, establishing the terms under which they will conduct their business or personal interactions. While an agreement can be binding, not all agreements hold the same legal weight as contracts.

You may also like: Signature guarantee vs notary

What is a Contract?

A contract is a written document that outlines the duties, responsibilities, and obligations that both parties must follow. It allows everyone to recall what was agreed to, which is especially important in complex transactions, and it protects everyone involved if something goes wrong.

Contracts are legally enforceable formal agreements. If one of the entities fails to follow the rules, the others can use them as evidence. If one party does any type of breach of contract or fails to perform their end of the bargain, the other party may sue.

You may also like: What is a CLM

Agreement vs Contract

A contract is an agreement, but not every agreement is a contract. An agreement can be informal or formal; a contract can be verbal or formal; a contract is always enforceable if it contains specific standards. The difference between agreement and contract varies between jurisdictions, such as the United Kingdom and the United States. Let’s explore how each legal system treats these terms.

In the UK:

In the UK, an agreement refers to a broader concept, encompassing both formal and informal arrangements. It can be as simple as a handshake or an exchange of emails outlining the terms of a transaction. While an agreement can be legally binding, its enforceability depends on several factors, including the intention of the parties and the presence of consideration (something of value exchanged between them). However, not all agreements need to meet the formalities required for the clause of a contract to be legally binding.

A contract, on the other hand, is a specific type of agreement that meets certain legal criteria, including offer, acceptance, consideration, and an intention to create legal relations. In the UK, contracts must adhere to specific formalities, such as being in writing and signed, in certain situations. These formal requirements provide greater clarity and certainty regarding the parties’ rights and obligations.

In the US:

In the US, the difference between an agreement and a contract is less rigid. Generally, an agreement refers to a broader concept similar to the UK definition. It denotes the coming together of parties to establish rights and responsibilities, regardless of whether it is oral or written. However, once the terms of an agreement meet specific legal criteria, it becomes a contract.

You may also like: Contract administration vs Contract management

What is a Legally Binding Contract?

A legally binding contract is an agreement between two or more parties that is enforceable by law. For a contract to be legally binding, it must contain certain essential elements in a contract:

• Offer: One party makes a clear contract proposal or promise.
• Acceptance: The other party agrees to the terms of the offer without modifications.
• Consideration: There is a mutual exchange of something valuable, such as money, goods, or services.
• Intention to create legal relations: Both parties intend to enter into a legally binding agreement.
• Capacity: The parties involved have the legal capacity to enter into the express or implied contract.
• Consent: The agreement is entered into voluntarily, without fraud, duress, or undue influence.

Once these elements are present, the contract is binding, and failure to fulfill the obligations outlined in the agreement can lead to legal consequences.

You may also like: What can contract management software ensure

Contracts and Agreements in Action

To understand the practical implications of agreements and contracts, let’s consider a few examples:

• Renting an apartment: When a tenant and a landlord agree on the terms of a lease, they enter into an agreement. Once both parties sign the lease agreement, it becomes a legally binding contract that outlines the rights and obligations of each party during the tenancy period.
• Freelance services: A client and a freelance professional may negotiate the terms of a project through emails or other written communications. This initial correspondence constitutes an agreement. However, once they both sign a formal contract that specifies the scope of work, payment terms, and project timeline, it becomes a legally binding contract that protects the rights and expectations of both parties.

You may also like: Blockchain contract management

Why Would You Have an Agreement Instead of a Contract?

While contracts provide a higher level of legal protection and enforceability, there are situations where an agreement may be more suitable:

Informal arrangements: In certain circumstances, such as between friends or family members, a formal contract may be seen as excessive or unnecessary. An informal agreement can still establish the terms of the arrangement and maintain trust between the parties involved.

Exploratory discussions: During the early stages of a business negotiation or partnership, parties may prefer to have a preliminary agreement to outline their intentions and expectations. This allows them to gauge mutual interest and move forward without committing to a binding contract until both parties are ready.

Confidentiality agreements: Non-disclosure agreements (NDAs) are often used to protect sensitive information during discussions between parties considering a potential business partnership or collaboration. These agreements establish a duty of confidentiality but may not contain the full range of terms and conditions typically found in a contract.

You may also like: Redline contract meaning

Agreements vs Contracts: Examples

To further illustrate the distinction between agreements and contracts, here are a few examples:

• Memorandum of Understanding (MOU): A memorandum of understanding is a document that outlines the intentions and expectations of parties entering into a partnership or joint venture. It serves as an agreement to negotiate and establish a future contract.
• Service-level agreement (SLA): An SLA is a contract that defines the level of service expected from a service provider and the remedies or penalties if those service levels are not met. It outlines specific metrics, response times, and obligations of both parties.
• Letter of Intent (LOI): A letter of intent is often used in business acquisitions to express the preliminary intentions of the buyer and seller. While it signifies a commitment to negotiate, it is not a legally binding contract and serves as a starting point for further discussions.

You may also like: Contract compliance process

Conclusion

In conclusion, while agreements and contracts share similarities, they have distinct differences in terms of legal enforceability and the level of formality required. An agreement can be an informal or formal understanding between parties, whereas a contract is a legally binding document that contains essential elements and safeguards the rights and obligations of the involved parties. Understanding these differences is crucial in navigating business transactions and ensuring legal clarity and protection for all parties involved.

Did you find this Legitt article worthwhile? More engaging blogs about smart contracts on the blockchain, contract management software and electronic signatures can be found in the Legitt Blogs section. You may also contact Legitt to hire the best contract lifecycle management services and solutions along with free contract templates.