Contract vs. Agreement: Which One Is Right For Your Business?

Content

• What’s an agreement?
• What’s a contract?
• What are the main distinctions between agreements and contracts?
• Should businesses use a contract or an agreement? 

The terms "contract" and "agreement" are frequently used in everyday speech without regard to their subtleties. But in a legal setting, being aware of the distinctions is essential to err on the side of caution. While consent and promises are part of contracts and agreements, they don’t hold the same value under the law.

Agreements are informal arrangements between parties that don’t require legal language or backing. On the other hand, contracts are much more formal, with their specific terms and legal enforceability. Depending on your needs and the severity of the situation, individuals can choose between a contract and an agreement. For instance, lending your mower to your neighbor doesn’t require more than a verbal agreement, whereas a business transaction with a vendor is a whole other ball game.

What’s an agreement?

An agreement is an expression of mutual acceptance between two or more parties. They’re a meeting of minds with a shared purpose and go beyond the meaning of a promise or bargain. These informal arrangements can be verbal or written. Contrary to contracts, agreements are flexible and do not have any set legal requirements. They are, therefore, more challenging to enforce legally. 

Especially for verbal agreements, there’s no way to keep track of terms or compliance. But if two or more parties have mutual trust and confidence, then agreements are perfect for saving time and money in low-stake situations. They can have a mutual understanding without complex paperwork or processes.

What’s a contract?

A contract is a legally enforceable arrangement between two or more parties. They outline the obligations, rights, and benefits of the parties involved. And if either party doesn’t hold up their end of the bargain and there’s a breach of contract, the wronged party can appeal to the court. Written contracts serve as a formal record of the arrangement and are admissible as proof in court. Unlike agreements, contracts require specific elements to make them legally valid. 

• Mutual assent: All the parties involved must agree to the terms of the contract. 
• Offer and acceptance: One party must make an offer, and the counterparty must accept it.
• Consideration: There must be an exchange of something of value or adequate compensation.
• Capacity: All the parties must be legally capable of entering a contract.
• Legality: The contract's goals must align with the law. 

What are the main distinctions between agreements and contracts?

An agreement is merely an arrangement or ascent between parties. There is no binding obligation on either party to carry out the terms. Contracts, on the other hand, are agreements with legal standing. Though often used interchangeably, there are quite a few differences between contracts and agreements, such as:

Legal Enforceability

One of the prominent differences between a contract and an agreement is that the former is legally enforceable. A contract creates duties and rights that all the parties are lawfully bound to comply with. It comes under contract law, and parties can seek remedies for breach of contract.  If a party fails to fulfill its obligations, the other party can seek legal remedies through the court system, such as damages or specific performance. Contracts offer the parties involved a higher level of legal protection and certainty.

In contrast, an agreement is a broader term that refers to a mutual understanding or arrangement between parties. While consent and shared goal lay the foundation, not all agreements are necessarily legally enforceable.  Neither party is bound by the terms of the arrangement to the extent required by Law. For instance, verbal agreements don’t have tangible evidence to hold the parties responsible. 

Formality

Contracts are often more formal and structured than agreements. The former typically require specific elements such as offer, acceptance, consideration, and intention to create legal relations. On the contrary, agreements can be more flexible and adaptable to different situations. They are customizable to the needs and circumstances without strict adherence to legal formalities.

Furthermore, contracts generally need to be in writing. Although, some oral contracts may also be enforceable under certain circumstances. While agreements may be made orally or in writing, they are occasionally even implied by the behavior of the parties. Lastly, contracts require signatures, specific language, and compliance with applicable laws and regulations. Agreements just focus on establishing a general understanding or arrangement between the parties. 

Legal Requirements

Contracts are subject to specific legal requirements, which may vary depending on the jurisdiction and the nature of the contract. These prerequisites include particular terms and conditions, signatures, and payment. Some jurisdictions have specific laws that require certain types of contracts to be in writing to be enforceable. They typically apply to arrangements involving real estate, the sale of goods over a certain value, or contracts that cannot be performed within a specified period.

In general, contracts are subject to higher levels of legal formality and requirements than agreements. The parties involved have a mutual understanding and intention to be bound by the terms. For agreements to be legally enforceable, there must be an intent by the parties to create legal relations.

Complexity

Contracts are typically more complex and detailed than agreements. Contracts include more detailed provisions and clauses that cover various aspects of the arrangement. These provisions define the rights, obligations, and responsibilities. They may cover areas such as payment terms, delivery schedules, performance metrics, dispute resolution mechanisms, termination rights, intellectual property rights, and confidentiality obligations.  Agreements may be less detailed and focus more on the core terms of the understanding between the parties.

The complexity of contracts is a consequence of the need to protect the parties' interests and ensure compliance with relevant laws and regulations.  They must be comprehensive enough to allocate risks appropriately and provide remedies in case of breach or dispute. Agreements may have fewer legal implications and may not require the same level of legal scrutiny.

Scope and Purpose

Contracts require an intention by the parties to create legal relations. In other words, the parties entering into the contract must intend to be held accountable by its terms. Agreements don’t always have the same level of intent to establish legal relations, especially when they take place in casual or social settings. 

Contracts come in handy for more significant and complex transactions or business relationships. They outline the rights and obligations related to services, goods, employment, or partnerships. Agreements, on the other hand, can be used for a variety of purposes, including informal arrangements, social deals, or simple transactions.

Should businesses use a contract or an agreement? 

While agreements are a quick and easy solution, organizations require the complexities and enforceability of contracts for prospering business relationships. It gives them a better chance of ensuring compliance with terms and conditions. Contracts offer legal protection for the rights and interests of the parties involved. 

Legal Requirements

Consider the legal requirements applicable to your specific jurisdiction and industry. When engaging in certain types of transactions, such as the sale or transfer of the real estate, the sale of goods worth more than $500, marriage or divorce agreements, or terms that will take longer than a year to complete, contracts may need to satisfy specific legal requirements to be valid and enforceable.

Risk and Liability

If the transaction or relationship carries a higher level of risk or potential liability, it may be advisable to use a contract. They typically provide more comprehensive protection by including detailed provisions on risk allocation, indemnification, limitation of liability, and dispute resolution mechanisms. They offer a higher level of legal enforceability and can help mitigate potential risks.

Long-term Commitments

For long-term commitments or complex business relationships, such as partnerships, joint ventures, or major service agreements, using a contract is often recommended. Contracts provide a more robust framework for addressing contingencies, managing performance, and protecting the rights and obligations of the parties involved.

Customization and Negotiation

If the terms of the transaction or relationship require customization and negotiation to address specific needs, interests, or risks, a contract is generally more appropriate. Contracts allow for greater flexibility in tailoring the terms to meet the unique requirements of the parties.

Ultimately, the decision to use a contract or an agreement comes down to the industry, the complexity of the transaction, and the legal requirements applicable to your jurisdiction. But businesses can make their contracting process quick and easy with contract management software. Dock 365 offers extensive template and clause libraries to speed up contract generation. The automated workflows and integration with e-signature solutions ensure even the most complex contracts pass through review, approval, and signing without hiccups.