Some documents are agreements, and others are contracts, but what really is the difference between a contract and an agreement and why does contract vs agreement even 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, your clients, and your business.
What is an agreement?
So, how do you define an agreement? An agreement is an arrangement or a promise between two or more parties to do or not do something.
Some informal and often unwritten agreements are known as “gentlemen’s agreements,” where the adherence to its terms relies on honor, not enforceability.
Agreements between two or more parties are based on trust between those parties 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 certain of the mutual assent of all parties or you may be stuck holding the bag when your deal falls through.
An agreement is often seen as a prelude to a contract. Before you can start to think about the required elements of a contract, all parties have to hold a “meeting of minds” to ensure mutual understanding — i.e., that they’re on the same page.
Are there any 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:
- Stock Purchase Agreement
- Money Transfer Agreement
- Prenuptial Agreement
- Software Development Agreement
- Internet Service Agreement
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.
Alright, what is a contract then?
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: Iis 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.
Whatever the types of contracts in question, to ensure their legality, they should include these key elements:
- Identification of all the parties involved.
- Offer. Details of what it is one party is offering the other or that all parties are agreeing to provide one another.
- Acceptance. Clear confirmation that all involved parties agree to the terms of the contract.
- Consideration. Details of the value (financial or otherwise) being provided by the parties.
- Competency and capacity. Meaning all parties are capable of both understanding and undertaking the terms of the contract.
- Legality. Elements like signatures and dispute resolution clauses may be necessary to ensure the legality of any contract.
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.
What are the most common 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:
- Freelance Contract
- Wedding Photography Contract
- Employment Contract
- Auto Repair Contract
- Gym Membership Contract
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.
So, what’s the key difference 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 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 agreements are generally broader, and the range of a contract narrower. Agreements cover all types of arrangements, including contracts, while contracts only cover legally enforceable documents.
- Contracts have to have the essential elements listed above: An agreement becomes a contract if it includes identification, offer, acceptance, consideration, competence, and elements to ensure legality in the relevant jurisdiction.
Remember, only enforceable contracts can be disputed in a court of law.
Letter of agreement vs contract: When to use
For complex arrangements — and most business use cases — a contract is the best way to protect both parties. That doesn’t mean that letters of agreement can’t be useful, though.
A letter of agreement that contains the three key elements of what makes a contract valid, (An offer, a consideration, and an acceptance) can still be considered legally enforceable.
Letters of agreement are usually light on details.
So, if complex disputes arise around the specifics of a deal it can cause problems.
That means that they’re more suitable for arrangements between private individuals than business deals.
Having said that, some legal teams will use letters of agreement as a precursor to a contract.
This is useful for long-term projects like large-scale construction, logistics, and manufacturing.
For example, if both parties agree to a long-term project but want to agree on budgets and details for each stage of delivery.
In this case, a letter of agreement could act as a placeholder, tying together multiple more complex contracts.
To summarize, a contract will be needed for any complex arrangements.
If all parties want to ensure specific conditions and legal protections, then a contract is more suitable.
A letter of agreement suits simple agreements.
Arrangements between friends or personal financial issues such as debt management are potential examples.
When must a contract be in writing?
It’s good business sense to put all contracts in writing, but there are some situations where a written contract is a legal requirement.
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 a court of law
Can you create a contract without meaning to?
Yes, it’s possible to find yourself in what’s known as an implied contract.
An implied contract can exist if:
- The parties assumed the contract existed, or
- If the contract didn’t exist, 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 can be pretty high, and while it’s unwise to commit to a contract without legal advice, you can make start drafting one using templates and other online resources. That will limit the amount of time an attorney may need to bill you for.
Contract vs. terms and conditions: Differences and when each are needed
Terms and conditions outline the rights and responsibilities of both (or all) 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:
- Terms and 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 and conditions cannot be binding by themselves. Terms and conditions aren’t always required by law but can limit your liability.
- Terms and conditions are required if you want to terminate your contract. Without specified conditions for ending a contract, that 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: Differences and their key terms
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. 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.
- 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 can be 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 clearly 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.
Why are written contracts important in transactions?
Transactions should always be protected with a written contract.
The more complex the transaction is, the more important having a written contract becomes.
Employment contracts, for example, make both parties’ responsibilities clear.
It’s an in-depth transaction that goes beyond payment for a service. The written details make any legal disputes much easier to resolve.
Proof of details
This is the most basic point of any contract.
Proof of details means that the contract is considered to reflect both parties’ full understanding of the agreement.
That means that anything specified in the contract cannot be considered “out of scope.”
Conversely, it means that one party cannot impose further restrictions on the other if they weren’t part of the original terms.
For the parties involved in the contract, it serves as a record of the agreement.
If it’s a goods transfer from a supplier, for example, a business could use it as a reference point for inventory management, and so on.
Miscommunication can harm business relationships and cause costly errors. With a contract serving as a written record, it’s easy to reference this in ongoing communications.
You can lend weight to your words in B2B communication by using contract details as a reference point.
It also makes it much harder to affect an agreement or arrangement with a client with a simple mistake like a typo in an email.
Provide peace of mind
With a contract in place, all parties know that their interests are protected if anything goes wrong.
This peace of mind means that collaboration can proceed without mistrust or misunderstanding getting in the way.
From the legal team’s perspective, having a written contract means less back-and-forth.
You don’t need constant sign-offs and approvals if everyone knows the limits of a contract.
Mutually assured confidentiality is a benefit of written contracts that is highly valued. Any contract can include non-disclosure clauses agreed between parties. This can protect details like unit prices and other sensitive internal information.
Avoid time-consuming legal battles
Written contracts make resolving legal disputes less time-consuming. Contracts will be broken sometimes, even if both parties have the best intentions. If a contract is detailed enough that parties can agree on who is at fault for a breach, then litigation can be avoided completely.
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.
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.
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.
Contract vs. agreement: 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 document workflow solution, together with legally binding templates.
To take advantage of PandaDoc’s incredible contract templates, agreement templates, and 750+ other fully-customizable templates, sign up for a free 14-day trial with us today.
Originally published January 5, 2022, updated January 12, 2023