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In legal terms, “contract” and “agreement” have distinct meanings. Often, people confuse the two. An agreement can be informal and even spoken, while a contract is a formal document that must be legally enforceable. An agreement is not legally enforced, but a contract is legally binding. All contracts are agreements, but not all agreements are contracts.
Contract and agreement are both legal terms, but they are very different from each other. Now that we know the basic difference between a contract and an agreement, let us go into detail and know what these terms mean and why they are important to know. Both terms have their own benefits, but they also come with some cons.
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What is an Agreement?
Agreements are very informal. They are not very rigid. Agreement is the understanding between the two parties, which can also be referred to as ‘handshake agreements’.
Agreements are generally verbal, but as said, in some cases they may turn into contracts and become legally binding.
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Now, you must be wondering: when are verbal agreements not legally binding? Let’s talk about the United States and know when a verbal agreement doesn’t require legally binding or a contract:
- The transfer or sale of a real estate or land interest
- Conditions (such as copyright) that last for a lifetime of one of the parties
- Selling items for more than $500
- Agreements for marriage or divorce
- Conditions that will require more than a year to complete
- A pledge made by someone to settle the debt of another
When agreeing in the United Kingdom or other parts of the world, a contract is legally binding when two or more parties agree on the services to be provided and their payment. However, certain agreements, such as rental agreements, property purchases, consumer credit contracts, and intellectual property rights may have exceptions.
It is not advisable to rely solely on verbal commitments, as they are not always reliable. Verbal agreements are difficult to enforce because there is no written document to prove it and therefore, courts may not rely on them. It is important to have a written agreement to ensure that both parties are committed to the terms and conditions outlined in the contract.
Benefits of an agreement:
- Quick and simple
- Informal
- Flexible in nature
Examples of agreement
Suppose there are three friends, X, Y and Z, who have planned to go on a trip next week. They have decided the dates, the place, the timing, and everything else. Nothing is written, but they have verbally agreed upon it. In this case, it can be referred to as an agreement.
What is a Contract?
A contract is a written document that outlines the roles and responsibilities, duties, commitments, and details of services agreed upon by two parties. It’s a legal way to document everything and ensure that both parties benefit from the agreement.
Contracts are formal and legally binding agreements that can be used as evidence in case anything goes wrong or if any party fails to follow the rules. Legal action can be taken if any party breaches the contract.
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Benefits of a Written Contract:
- Legally enforceable
- Tangible proof
- Minimizes risk and disputes
- Can be made quickly if proper template is used
- Helps make terms and responsibilities clear
Examples of a Written Contract
For better understanding, a few examples of a written contract are:
- Mortgage agreements
- Lease agreements
- Online purchases
- Sign-up agreements
- Insurance
When Can a Contract Become Legally Binding?
Having a contract with clear terms and conditions and with easy language that can be understood by both parties is very important. A contract can be legally binding when the following conditions are met:
- Offer and acceptance of both parties
- Consideration (each party must exchange something of value)
- Legality, keeping the law in mind
- Parties must be capable enough to understand the terms and conditions mentioned in the contract
- Consent of both parties to enter into a written contract
Difference Between Contract and Agreement
As mentioned earlier, let us check in detail the difference between a contract and an agreement, as it is important to understand.
| Basis | Agreement | Contract |
| Meaning | The acceptance given informally or verbally between two or more parties | Contract is something that is made with the law in mind and is properly documented |
| Definition | Section 2(e) of the Indian Contract Act, 1872, defines an agreement as, “every promise and every set of promises, forming the consideration for each other, is an agreement.” | Section 2(h) of the Indian Contract Act, 1872, defines a contract as, “an agreement enforceable through the law.” |
| Elements | Agreement = Offer + Acceptance | Contract = Agreement + Enforceable by Law |
| Scope | An agreement has a wider scope than a contract | As compared, a contract has a narrow scope |
| Risk | Not enforceable by law, hence high risk chances | As it is by law, it has very low-risk |
| One in Another | All agreements cannot be considered as contract | All contracts can be considered agreements. |
| Legal Obligation | An agreement does not create a legal obligation | Contracts are meant to create a legal obligation |
| Consideration | Agreements can be formed without consideration | Consideration is required to form a contract |
Similarities Between Contract and Agreement
With differences, there are a few similarities between a contract and an agreement as well. Let’s see how they are similar:
- Agreement of free will: The parties to an agreement or a contract must give their full consent.
- Intention to generate obligations: Contracts and agreements both set forth the parties’ expectations and duties.
- Mutual understanding: Mutual understanding of the terms and conditions is necessary for both agreements and contracts.
- Communication: Effective communication between the parties is essential to both agreements and contracts.
- Validity: Both contracts and agreements must be lawful and per public policy.
- Consideration: The exchange of anything of value for consideration is a possibility in both agreements and contracts.
- Resolution of disputes: Contracts and agreements may both call for the settlement of disagreements that develop throughout the term of the agreement.
- Good faith: Parties are typically expected to operate in good faith and carry out their commitments under both agreements and contracts.
- Legal repercussions: If an agreement or contract is broken, there may be legal repercussions.
- Relationship building: Both contracts and agreements can help to establish and preserve relationships between the parties involved.
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FAQs
No, not all agreements are enforceable by law but all contracts are made keeping the law in mind.
If you want something to be documented and have specific rules and regulations, so that there is no discrepancy in the future, then a contract is a better option. This is also because, if anything happens in the future, it can go to court.
Yes, all contracts are agreements, but not all agreements are contracts.
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