Are you confused about the difference between an agreement and a contract? Don’t worry, you’re not alone! These legal terms are often used interchangeably, but they actually have distinct differences that can impact your business dealings. In this blog post, we’ll break down the key differences between agreements and contracts and help you understand which one is right for your situation.
Agreement Vs Contract (Comparison Chart)
| Agreement | Contract |
|---|---|
| An agreement is a mutual understanding or arrangement between two or more parties regarding a specific matter. | A contract is a legally binding agreement between two or more parties that outlines the rights, obligations, and responsibilities of each party |
| An agreement is not legally binding. | A contract is legally binding, which means that the parties involved are legally obligated to fulfill their promises or obligations stated in the contract. |
| It can be either verbal or written. | It must be in writing to be enforceable. |
| An agreement does not need to involve consideration, which refers to something of value exchanged between the parties. | A contract must involve consideration to be valid. |
| An agreement can be made between two individuals or entities without any specific requirement regarding their competence or legal capacity | A contract must be made between two parties who are competent to enter into a binding legal agreement. |
| It may be voidable if one of the parties lacks capacity or if there is duress, fraud, or misrepresentation. | It may only be voidable if there is fraud or misrepresentation. |
| It can be terminated by mutual consent of the parties involved. | A contract can only be terminated by performance, meaning both parties have fulfilled their obligations, or by a breach of terms. |
| An agreement is usually used to document a mutual understanding between parties in an informal way. | It provides a formal and detailed document that specifies the rights, obligations, and responsibilities of each party involved. |
What is an Agreement?
An agreement refers to mutual understanding or arrangement between two or more parties. This can be written, verbal, or implied through action. An agreement creates mutual obligations between the parties involved. The main purpose of an agreement is to establish the terms of a relationship or transaction.
Moreover, an agreement occurs when two or more parties agree to exchange goods, services, money, or promises of any kind. It may or may not be enforceable in a court of law and may be subject to certain legal requirements, depending on the nature of the agreement.
What is a Contract?
A contract, on the other hand, is an agreement between two or more parties that is legally binding and enforceable by law. A contract takes place when an offer is made, accepted, and the parties exchange consideration (things of value). Generally speaking, a contract will outline the rights and responsibilities of each party in order to ensure that all parties are on the same page with regard to their agreement.
Types of Contract
- Express contracts – An express contract is one where the terms are clearly stated by the parties involved. All parties must agree to these terms before the contract is considered valid.
- Implied contracts – An implied contract is one where the terms are not explicitly stated but are assumed by the actions of the parties involved. For example, if you purchase a product from a store, there is an implied contract that you will pay for that product.
- Bilateral contracts – A bilateral contract is one where both parties are obligated to perform some type of action under the terms of the agreement. For example, if you purchase a car from a dealership, you are agreeing to pay for the car and the dealership is agreeing to provide you with the car.
- Unilateral contracts – A unilateral contract is one where only one party is obligated to perform an action under the terms of the agreement. An example of this would be if you made a bet with someone and lost, you would be obligated to pay up according to the terms of your bet.
Key Differences Between Agreement and Contract
While comparing agreement vs contract, here we have included some of the key distinctions between them.
- Legally Binding – The primary difference between an agreement and a contract is that an agreement is not legally binding, while a contract is.
- Consideration – An agreement does not need to involve consideration (something of value exchanged between the parties). On the other hand, a contract must involve consideration to be valid.
- Voidability – An agreement may be voidable if one of the parties lacks capacity or there is duress, fraud, or misrepresentation. On the other hand, a contract may only be voidable if there is duress, fraud, or misrepresentation.
- Termination – An agreement can be terminated by mutual consent of the parties. In contrast, a contract can only be terminated by performance or breach of terms.
Examples of When to Use Each Legal Document
There are many different types of legal documents, and it can be confusing to know when to use each one. Here are some examples of when to use each type of document:
Agreement:
- An agreement can be referred to as a promise between two or more individuals or entities. This can be either verbal or written. An example of an agreement would be if you promised to pay someone back for a loan.
- Memorandum of Understanding – A Memorandum of Understanding (MOU) is a document that outlines the terms of an agreement between two or more parties. It is not legally binding, but it can be used as evidence in court if there is a dispute.
Contract:
- A contract is a legally binding agreement between two or more parties that creates an obligation to do (or not do) something. Contracts are usually in writing, and they are mostly formal. An example of a contract would be if you signed a lease for an apartment.
- Letter of Intent – A Letter of Intent (LOI) is similar to an MOU, but it is usually used when two parties are planning to enter into a formal contract. It typically outlines the terms of the proposed contract and the intention of both parties to sign it.
Legal Requirements of Agreement for Enforceability
There are a few key requirements that must be met in order for an agreement to be legally binding and enforceable.
– First, the agreement must be in writing and signed by both parties.
– Second, there must be a consideration, which means that each party must offer something of value to the other party in exchange for their promises.
– Third, the parties have to have the capacity to enter into a contract, which means they must be of legal age and sound mind.
– Finally, the agreement must be made with the intention of creating a legal relationship between the parties. If any of these requirements are not met, then the agreement may not be enforceable in court.
Conclusion
Understanding the differences between an agreement and a contract is essential for any business to ensure that all parties involved are legally protected. Agreement terms may be more flexible than contracts, but they can still be binding in certain cases. On the other hand, contracts require special consideration due to legal implications if broken.
Knowing when it’s appropriate to enter into either an agreement or a contract will help you protect your rights while ensuring that all parties involved fulfill their obligations in accordance with established laws.
