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Contract vs. agreement: What’s the real difference?

Contract vs. agreement: What’s the real difference?

Some documents are agreements, others are contracts, but why does that matter?

We’ll tell you why — use the wrong document, and you could wind up in a whole lot of financial and legal trouble. Use the correct document, and you’ll protect yourself and your business.

What is an agreement?

An agreement is an arrangement or a promise between two or more parties to do or not do something. These informal and often unwritten agreements are also known as “gentlemen’s agreements,” where the adherence to its terms relies on honor, not enforceability.

Agreements are based on trust and aren’t legally enforceable with arbitration or in a court.

If one party doesn’t do what they say they will, the other party isn’t entitled to any remedy or compensation.

If you choose to draft an “agreement,” make sure you’re absolutely positive all parties will pull through in the end, or you may be stuck holding the bag when your deal falls through.

An agreement will always have the following features:

  • Defined under conditions presented in Section 2 (e) of the Indian Contract Act, 1872.
  • Validity is based on mutual acceptance by all parties involved.
  • Doesn’t require a physical paper copy, digital copy, or a signature.
  • A lack of consideration. All parties do not have to exchange goods, money, services, or something of value to start the agreement.
  • A lack of competence. If the document isn’t legally binding, the parties can technically be minors, mentally deficient, or under the influence of drugs or alcohol upon signing. However, stating that a contract is an agreement, assuming that the agreement isn’t legally binding, would void the contract, regardless of whether all parties are considered competent enough to sign.
  • Won’t be considered legal. For an agreement to hold up in court, it has to turn into a contract or another binding document that falls within the confines of lawful conduct.

An agreement is often seen as a prelude to a contract. Before you can even write a formal contract, both parties have to hold a “meeting of minds” to ensure they’re on the same page.

Agreement examples

Although you don’t need to put your agreements in writing, professionally designed agreements are a vital ingredient to most business relationships.

Large corporations, freelancers, and everything in between can use agreement templates to help structure their business deals.

Here are a few agreement examples you’ll likely use:

Keep in mind that contracts are often called agreements. If your business partner asks you to sign an “agreement,” ask if it’s legally binding. If it is, ask them to draft a “contract” instead.

What is a contract?

All contracts are agreements, but not all agreements are contracts. In the business world, the term “agreement” is common parlance for “contract,” making it difficult for legal newbies to understand the difference.

Pop quiz: is a non-disclosure agreement (NDA) a contract?

The answer is yes. Why? Because an NDA is a specific type of agreement that meets certain requirements designed to create legally binding obligations.

An NDA, despite it being called an “agreement,” is a formal arrangement between two or more parties that’s enforceable in court.

A contract will always have the following features:

  • Defined under conditions presented in Section 2 (h) of the Indian Contract Act, 1872.
  • Validity is based on mutual acceptance by all parties involved.
  • Doesn’t require a physical paper copy, digital copy, or a signature in some cases, but specific contracts, such as ones involving land, must be in writing.
  • Must contain consideration. All parties must exchange goods, money, services, or something of value to constitute a contract. If only one party provides something and asks for nothing in return, it’s considered a “gift” and voids the contract.
  • All parties must adhere to competence, meaning they comprehend the contract and know what it entails. No party can be minors, mentally deficient, or under the influence of drugs or alcohol upon signing. If even one member is non-competent at the time of signing, it voids the contract.
  • Is considered legal. Contracts are confined to federal and state law and can’t include elements that would void the document (i.e., illegal activity). If both parties agree upon the total contract, all legally binding elements will hold up in court.

A contract isn’t considered legal by itself. The person who drafts the contracts must ensure that all parties accept the terms outlined in the document via verbal confirmation and a signature.

If one or more of the parties involved don’t agree to said terms, they can negotiate the contract.

Contract examples

Contracts, just like agreements, don’t have to be in writing.

But, if you use contract templates, you can streamline your workflow and standardize your business terms and obligations. Business leaders and independent contractors need contracts to protect themselves from legal exposure.

Here are a few contract examples you’ll likely use:

Most contracts are pretty standard unless they involve selling goods or services. For example, a catering contract would cover your costs, duties, and what you expect from the other party.

Key differences between an agreement and a contract

At first glance, a written agreement and contract look similar, but key differences in the two documents make the distinction more obvious.

Here are a few ways you can instantly tell if what you’re looking at is either a contract or agreement:

  • Agreements are usually casual and verbal. A verbal agreement will rarely hold up in court, but a written agreement could still masquerade as a contract.
  • The scope of the agreement is broader, and the range of a contract is narrower. Agreements cover all types of arrangements, including contracts, while contracts only cover legally enforceable documents.
  • Agreements are defined in Section 2 (e), while a Contract is defined in Section 2 (h) of the Indian Contract Act, 1872. Each section covers why and how you draft each document.
  • Contracts have to have three essential elements: An agreement becomes a contract if it includes offer and acceptance, consideration, and competence. Agreements do not reflect the three requirements of an enforceable contract.
  • Agreements are made between friends; contracts are made between business partners. Friends can also be business partners, but business partners are rarely friends right off the bat. If a business partner hands you an “agreement,” it’s likely a contract. Review the document to see if it has the three essential elements.

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.

When a contract must be in writing

It’s good business sense to put all contracts in writing, but there are some situations that can’t be enforced without one. Since US state law dictates what can and can’t be enforced with a contract, the US statute of frauds requires the following contracts to be written, or they won’t be legal.

  • Promise to pay or accept another person’s debt
  • Subscriptions for a periodical service, such as a newspaper subscription
  • Leases for real estate, whether private or business-related, that exceed one year
  • Contracts for the sale of real estate, whether related to improved or unimproved land
  • Satisfaction of a debt for less than the total amount due
  • Agreements that guarantee the results of a surgical or medical procedure
  • Other contracts that the party or parties wish to dispute in the court of law

Can you create a contract without meaning to?

Yes, it’s possible to find yourself in an implied contract.

An implied contract can exist if:

  • The parties assumed the contract existed, or
  • If the contract existed, it would be unfair to at least one of the parties

For instance, if your neighbor shovels your driveway and you acknowledge their helpfulness, you may find a bill on your doorstep.

If they continue to shovel your driveway for several days, weeks, or months without you telling them to stop, you’ve created an implied contract and may have to pay them.

There are two types of implied contracts:

  • Implied-in-fact contracts: Created under the assumption that a contract was made.
  • Implied-in-law contracts: Created by law for the sake of justice. For example, if you choke on a bone in a restaurant and a doctor performs the Heimlich maneuver on you, saving your life. The doctor bills you for their services because you benefited from their services.

An implied contract can be taken to court, but it’s unlikely to be resolved without a written component.

However, as long as the contract has offer and acceptance, consideration, and competence, there’s a possibility you could be sued and lose your case.

Since implied contracts are legal, you must state your intentions before a situation gets out of hand.

This includes telling the neighbor that shoveled your driveway that you didn’t ask for their services, nor did you hire them or intend to hire them to complete this task.

Should I get an attorney to create a contract?

Only a lawyer can advise you on whether an agreement or contract is binding and what obligations or rights you may have if there’s a breach of terms. However, attorney fees are costly, and it’s unwise to do business without one.

Best alternative: PandaDoc templates

Not all templates are created equal. In fact, most of the templates you’ll find online lack legality, aren’t customizable enough for complex issues, and use language that’s too vague or too strict.

PandaDoc solves the complexity and legality issues you’ll find from competitors like Google Docs and Microsoft Word.

Through our contract management software, you can create legally binding contracts instantly. You’ll also benefit from seamless collaboration and a streamlined sales process.

Any of the 750+ templates in the PandaDoc template library will help you save time. Instead of creating these documents yourself or paying an attorney, discover the perfect template with us!

Contract vs. terms and conditions

The terms and conditions outline the rights and responsibilities of both parties.

This can include special or general conditions. When a person refers to the terms and conditions, they could be referring to the entire document found on websites or a section located in a contract.

Here are some ways you can tell a contract and terms and conditions apart:

  • The terms of conditions can be a whole document by itself or a portion of a contract, but it will never refer to an entire legally binding contract.
  • A contract can be legally binding, but the terms of conditions cannot be binding by themselves. Terms and conditions aren’t required by law but can limit your liability.
  • Terms and conditions are required if you want to terminate your contract. Without one, a contract won’t have a strict end date or a “terms” that would qualify termination.

Put a terms and conditions section at the end of every contract you draft. That way, you can include special conditions, like price variations and penalties, within your legally binding agreement.

Contract vs. a memorandum of understanding

A memorandum of understanding (MOU) is an agreement between two or more parties outlined as a formal document.

The MOU is often used as the starting point for negotiations and is often seen in international negotiations. MOUs aren’t legally binding documents, but they can lead to contracts.

To tell a contract and memorandum of understanding apart, consider the following:

  • A contract is legally enforceable, but the MOU, just like an agreement, isn’t. However, some parts of an MOU can be enforced if wrongful termination occurs.
  • The MOU is an outline of your expectations, whereas a contract is a list of obligations.
  • With a contract, both parties have the intention to make a legally binding agreement. An MOU won’t become enforceable unless there is evidence that the parties intend to create a legally binding agreement. Therefore, an MOU can turn into a contract.

Under U.S. law, an MOU is treated the same as a letter of intent. In many cases, a memorandum of agreement and a memorandum of understanding are indistinguishable and serve the same purpose.

Why a written contract is better than a verbal agreement

Although both verbal and written contracts are legally binding under the right circumstances, a written contract is generally the superior option for several reasons:

  • A verbal agreement can’t override a written contract
  • A written contract can outline the terms of the agreement
  • A written contract protects your personal and business relationships
  • A written contract is better at preventing misunderstandings
  • A written contract is easier to dispute in court

A written contract makes many personal and business-related transitions less complicated.

For example, writing a cancellation of lease agreement can ensure that your landlord doesn’t sue you for damages incurred from damages that weren’t yours.

Without a contract, it’s the landlord’s word against yours, and more often than not, your landlord will win the lawsuit.

How to make an agreement into a contract

Turning an agreement into a contract isn’t as easy as 1-2-3, but it isn’t as difficult as algebra.

A modern contract contains several smaller formal agreements that are merged into one document. For example, a contract may need terms and conditions, or you may need to tweak a debt settlement agreement to make it legally enforceable.

Other things you may need to add to an agreement to make it a contract include:

  • Remedies for breach: When an agreement is breached, those affected can’t seek counsel, but they can if they create a breach of contract. Although some penalties are prohibited, most businesses can receive monetary compensation for a breach.
  • Boilerplate clauses: Boilerplating refers to standardized copy, text, documents, or procedures that are used over and over again. In law, boilerplates are used to ensure contracts adhere to state statutes and rules.
  • Jurisdiction: Contracts must state which jurisdiction holds legal power if a dispute occurs. Since every state handles disputes differently, all parties must know where they can go to seek remedies or whether arbitration will be used instead of a trial.

Use a contract to maintain legal compliance

Knowing the difference between an agreement and a contract could save your business.

Although you could draft a contract yourself and take it to an attorney, you’ll save more time and money when you use the right content management tool filled with legally binding templates.

To take advantage of PandaDoc incredible contract templates, agreement templates, and 750+ other fully-customizable templates, sign up for a free 14-day trial with us today.

Yauhen is the Director of Demand Generation at PandaDoc. He’s been a marketer for 10+ years, and for the last five years, he’s been entirely focused on the electronic signature, proposal, and document management markets. Yauhen has experience speaking at niche conferences where he enjoys sharing his expertise with other curious marketers. And in his spare time, he is an avid fisherman and takes nearly 20 fishing trips every year.

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