The terms agreement and contract can often mean similar things, but there are cases where one is more accurate than the other.
Contrary to popular belief, the two terms cannot always be used interchangeably. Technically, a contract is an agreement, but an agreement is not always a contract.
Knowing the difference between an agreement and a contract is critical regarding the law. There can be a degree of informality with an agreement, whereas a contract is always legally enforceable if it contains certain requirements. With specific requirements, an agreement can be made into an enforceable contract.
Both agreements and contracts are considered a "meeting of minds," meaning both parties understand and consent to the agreement or contract, usually through an offer and an acceptance.
Keep reading the article to understand:
- All the key differences between a contract and an agreement
- Benefits of using each document
- When to use an agreement or a contract
By understanding all the information, you’ll be able to choose the correct legal document to deal make fair terms, deal with contract breaches, and more.
What is an Agreement?
An agreement is defined as a manifestation of mutual assent by two or more individuals. As mentioned, an agreement can be informal. Any two parties, such as two neighbors or two friends, can arrange an agreement between the two of them, even if it is only verbally. On the other hand, an agreement can be a complex document, such as a residential lease agreement.
An agreement can precede a contract. Some clauses that can be added to an agreement to make it a contract include:
- Boilerplate clauses
- Remedies for breach
- Jurisdiction for enforcement
Agreements can be written down, but that does not automatically make an agreement a contract. Unlike a contract, there are no rigid requirements when making an agreement.
Agreement Benefits
In many instances, agreements have benefits over formal contracts for the following reasons:
- Quick and easy. As agreements are not legally binding, there is no need for lengthy or complex paperwork or discussions.
- Informal. Two parties can make an agreement about almost anything. If you have faith the other party will hold up their end of the deal, you can easily come to a mutual understanding without having to create a legally binding contract.
- Flexible. If either party's situation changes, an agreement allows for easy alterations in the agreed-upon obligations.
What is a Contract?
A contract is considered a signed agreement between two or more parties that is enforceable by law.
Contrary to an agreement, specific elements are required to create an enforceable contract. A contract must include the following elements to be legally binding:
- Mutual assent
- Offer and acceptance
- Consideration
- Capacity to contract
- Legality of contract
The key here is the term "consideration." Consideration means that an exchange is made for adequate compensation. For example, an employee on a contract agrees to provide specific services in exchange for a predetermined payment.
If something has all the listed elements but is called an agreement, it is a contract, and it is legally enforceable.
For example, although called an agreement, a non-disclosure agreement (NDA) is technically a contract and is enforceable in court. An employee offer letter is not called an agreement nor a contract, but it is a contract as it contains all of the necessary elements.
A contract does not need to be written down. Verbal contracts can be legally binding if they contain all the above-listed requirements.
Contract Benefits
Contracts are suitable in situations where added protection is beneficial. Contracts offer the following benefits:
- Legally enforceable. Contracts are enforceable in court. If your agreement is a high risk, or you fear the other party won't hold up their end of the bargain, a contract can provide some peace of mind.
- Tangible proof. A contract provides tangible evidence, especially if it is written.
- Minimizes risk and disputes. One of the primary purposes of a contract is to clearly outline each party's rights and obligations in an agreement. With a contract, both parties must understand the terms before signing.
- Quick with the use of an online template. You can create a comprehensive document within minutes with a free online contract maker.
- Sets out clear terms and responsibilities. A contract clearly outlines both parties' expectations, so the chances of miscommunication are low with a contract in place.
A statute of fraud requires contracts meeting specific criteria to be in writing and signed by all parties bound by said contract. The purpose of these statutes is to reduce the risk of fraud or other injuries to the contract parties. These contracts often include those that deal with the sale of land or contracts that will take more than one year to complete.
Key Differences Between an Agreement and a Contract
The primary difference between an agreement and a contract is that a contract is legally enforceable, while an agreement often is not. A contract must meet several specific requirements to be enforceable.
| Agreement vs. Contract Differences and Similarities | |
|---|---|
| Agreement | Contract |
| An arrangement between two or more parties that is not enforceable by law | A formal arrangement between two or more parties that is enforceable by law by its terms and elements |
| Mutual understanding and acceptance by all parties involved | Mutual understanding and acceptance by all parties involved |
| Does not have to be written to be valid. | Specific types of contracts may need to be written |
| Consideration is not required. | Consideration is required |
| An agreement with no required elements of a contract has no legal effect | A contract is legally binding and may be enforceable in a court of law |
When to Use an Agreement and a Contract
An agreement can act as a precursor to a contract. Technically, a contract requires two parties to come to an agreement first; then, a contract can be created. With both an agreement and a contract, there should be a mutual understanding between the parties, so there can be no confusion in the agreement or contract's terms.
When to use an agreement:
Agreements can be helpful in informal situations. For example, if the other party is someone you know and trust, you may feel little need for a formal contract, especially if there is no money exchange involved.
When to use a contract:
A contract is beneficial in situations where you feel added protection might help. If there is significant risk involved in the agreement, turning it into a contract can provide certainty surrounding the rights and obligations of both parties involved.
The critical difference between contracts and agreements is that a contract is a form of agreement that is always legally enforceable. An agreement can be a contract, as long as it has all the elements of a contract that make it enforceable.
Helpful Resources:
Meeting of minds - LII
Agreement -LII
The terms agreement and contract can often mean similar things, but there are cases where one is more accurate than the other.
Contrary to popular belief, the two terms cannot always be used interchangeably. Technically, a contract is an agreement, but an agreement is not always a contract.
Knowing the difference between an agreement and a contract is critical regarding the law. There can be a degree of informality with an agreement, whereas a contract is always legally enforceable if it contains certain requirements. With specific requirements, an agreement can be made into an enforceable contract.
Both agreements and contracts are considered a "meeting of minds," meaning both parties understand and consent to the agreement or contract, usually through an offer and an acceptance.
Keep reading the article to understand:
- All the key differences between a contract and an agreement
- Benefits of using each document
- When to use an agreement or a contract
By understanding all the information, you’ll be able to choose the correct legal document to deal make fair terms, deal with contract breaches, and more.
What is an Agreement?
An agreement is defined as a manifestation of mutual assent by two or more individuals. As mentioned, an agreement can be informal. Any two parties, such as two neighbors or two friends, can arrange an agreement between the two of them, even if it is only verbally. On the other hand, an agreement can be a complex document, such as a residential lease agreement.
An agreement can precede a contract. Some clauses that can be added to an agreement to make it a contract include:
- Boilerplate clauses
- Remedies for breach
- Jurisdiction for enforcement
Agreements can be written down, but that does not automatically make an agreement a contract. Unlike a contract, there are no rigid requirements when making an agreement.
Agreement Benefits
In many instances, agreements have benefits over formal contracts for the following reasons:
- Quick and easy. As agreements are not legally binding, there is no need for lengthy or complex paperwork or discussions.
- Informal. Two parties can make an agreement about almost anything. If you have faith the other party will hold up their end of the deal, you can easily come to a mutual understanding without having to create a legally binding contract.
- Flexible. If either party's situation changes, an agreement allows for easy alterations in the agreed-upon obligations.
What is a Contract?
A contract is considered a signed agreement between two or more parties that is enforceable by law.
Contrary to an agreement, specific elements are required to create an enforceable contract. A contract must include the following elements to be legally binding:
- Mutual assent
- Offer and acceptance
- Consideration
- Capacity to contract
- Legality of contract
The key here is the term "consideration." Consideration means that an exchange is made for adequate compensation. For example, an employee on a contract agrees to provide specific services in exchange for a predetermined payment.
If something has all the listed elements but is called an agreement, it is a contract, and it is legally enforceable.
For example, although called an agreement, a non-disclosure agreement (NDA) is technically a contract and is enforceable in court. An employee offer letter is not called an agreement nor a contract, but it is a contract as it contains all of the necessary elements.
A contract does not need to be written down. Verbal contracts can be legally binding if they contain all the above-listed requirements.
Contract Benefits
Contracts are suitable in situations where added protection is beneficial. Contracts offer the following benefits:
- Legally enforceable. Contracts are enforceable in court. If your agreement is a high risk, or you fear the other party won't hold up their end of the bargain, a contract can provide some peace of mind.
- Tangible proof. A contract provides tangible evidence, especially if it is written.
- Minimizes risk and disputes. One of the primary purposes of a contract is to clearly outline each party's rights and obligations in an agreement. With a contract, both parties must understand the terms before signing.
- Quick with the use of an online template. You can create a comprehensive document within minutes with a free online contract maker.
- Sets out clear terms and responsibilities. A contract clearly outlines both parties' expectations, so the chances of miscommunication are low with a contract in place.
A statute of fraud requires contracts meeting specific criteria to be in writing and signed by all parties bound by said contract. The purpose of these statutes is to reduce the risk of fraud or other injuries to the contract parties. These contracts often include those that deal with the sale of land or contracts that will take more than one year to complete.
Key Differences Between an Agreement and a Contract
The primary difference between an agreement and a contract is that a contract is legally enforceable, while an agreement often is not. A contract must meet several specific requirements to be enforceable.
| Agreement vs. Contract Differences and Similarities | |
|---|---|
| Agreement | Contract |
| An arrangement between two or more parties that is not enforceable by law | A formal arrangement between two or more parties that is enforceable by law by its terms and elements |
| Mutual understanding and acceptance by all parties involved | Mutual understanding and acceptance by all parties involved |
| Does not have to be written to be valid. | Specific types of contracts may need to be written |
| Consideration is not required. | Consideration is required |
| An agreement with no required elements of a contract has no legal effect | A contract is legally binding and may be enforceable in a court of law |
When to Use an Agreement and a Contract
An agreement can act as a precursor to a contract. Technically, a contract requires two parties to come to an agreement first; then, a contract can be created. With both an agreement and a contract, there should be a mutual understanding between the parties, so there can be no confusion in the agreement or contract's terms.
When to use an agreement:
Agreements can be helpful in informal situations. For example, if the other party is someone you know and trust, you may feel little need for a formal contract, especially if there is no money exchange involved.
When to use a contract:
A contract is beneficial in situations where you feel added protection might help. If there is significant risk involved in the agreement, turning it into a contract can provide certainty surrounding the rights and obligations of both parties involved.
The critical difference between contracts and agreements is that a contract is a form of agreement that is always legally enforceable. An agreement can be a contract, as long as it has all the elements of a contract that make it enforceable.
Helpful Resources:
Meeting of minds - LII
Agreement -LII
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