Are Agreements & Contracts Different?

Female fashion designer contemplating agreements and contracts.

Chapter 3

There is a slight difference between agreements and contracts. If you blink, you may miss it.

CHAPTER AUTHOR

Lindsey Ehlman is on the content team at ApproveMe. She’s an MVP legal junkie, professional paralegal with over 6+ years experience and currently pursuing her doctorate of law. In this guide, Lindsey will outline how companies and individuals can craft, negotiate and execute a win-win (and enforceable) contract.

Date Published:

Contracts and agreements share some similarities. In fact, all contracts are essentially agreements. However, not all agreements are considered contracts. That may sound confusing, but the difference is relatively simple. The terms “agreement” and “contract” are often used interchangeably, but there are a few key differences. 

There is a slight difference between agreements and contracts. If you blink, you may miss it. Think of a contract as a more uniform and formal document.

Female fashion designer contemplating agreements and contracts.

What is an Agreement? 

Agreements are generally an understanding between parties, often referred to as “handshake agreements.” Agreements are usually informal in the sense that it serves as a promise and relies on morality to follow through on a promise made between the parties. Agreements are typically oral but can also be written. Written agreements, if all of the elements are met, can be considered enforceable agreements. Such agreements with enforceability are the types of contracts that you should strive for.

Since agreements are usually informal, they can pose significant legal consequences. These “gentlemen agreements” rely on all parties to respect their promises, but without the security that the promises will be enforced by a third-party.

As mentioned above, an agreement is usually unwritten, which typically means unenforceable. It is basically a promise to do or not to do something. There is nothing that assertively requires the parties to obey the terms. Instead, the parties rely on the “honor system” or are expected to follow a moral obligation. Agreements do not fulfill the required elements of a contract; therefore, it is not valid or enforceable in a court of law.    

What is a Contract?

Contracts are legally binding agreements. The court has the authority to enforce the terms in the contract if they are breached. A formal contract provides the non-breaching party the opportunity to bring legal action against the breaching party if the terms of the contract are not met.

Oral contracts are often hard to prove and lack the support needed for a court to enforce the terms. Contracts should always be written to protect the parties in the event of a breach of contract. Remember, only enforceable contracts can be disputed in a court of law. 

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3 Differences Between Agreements and Contracts 

A contract is a formal agreement between two or more parties to perform a specific duty or execute a particular service. A contract becomes validated when all parties to the contract agree to its terms. A valid contract can be enforced in a court of law or via alternative dispute resolutions such as mediation or arbitration. 

1. Agreements are usually casual and verbal

Agreements are usually spoken as opposed to written. Since they are informal, they usually do not have much of a leg to stand on concerning their enforcement. Contracts are formalized and are generally memorialized with signatures by all of the parties named in the contract. This illustrates that all parties have read, understood, and are agreeing to the terms listed in the contract. Not all contracts have to be written, but it is risky to enter into an oral contract because it is challenging to prove and makes it more difficult to enforce. 

2. Contracts Require 3 Essential Elements (Offer and Acceptance and Consideration)

For a contract to be legitimate, it needs to include three essential components: offer, and acceptance, and consideration. The exchange for goods or services is the consideration element of a contract. These elements are required for a contract to be legally binding. Agreements, especially “handshake agreements,” do not reflect the three requirements of an enforceable contract. 

3. Contracts are the Business Standard

In the business world, contracts are vital. All contracts started off as agreements as they worked their way through the negotiation phase. They eventually formed into a contract to be entered into by all of the named parties. However, a contract is not legally binding until all of the parties have signed the document. Contracts detail the arrangements and expectations between the parties. That way, if a party does not fulfill their duties under the contract, the other party has a legal remedy to have part or the entire contract enforced. 

Should I Use an Agreement or Contract?

Again, all contracts started out as agreements. Moreover, not all agreements are contracts. This usually occurs in a non-formal setting where a formal contract may not be necessary. For example, you give a friend a ride to school in exchange for $5. It does not seem worth the time or effort to create a contract for a small arrangement. There are certainly pros and cons to both contracts and agreements, and it depends on the circumstances of a deal between the parties.

However, when there is more money at stake, or the terms are more infinite, a contract is necessary. Additionally, in a business setting, contracts are advantageous. It cannot be overstated how important a written contract is and how it can substantially protect you and your growing business.

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