People tend to use the terms 'agreement' and 'contract' interchangeably. But in fact, while all contracts are agreements, not all agreements are contracts. Take master services agreements for example – despite being called agreements, they’re often actually binding contracts. Confused? Don’t panic. We’re here to demystify the contract jargon so you’ll never mix them up again.
Contract process can be just as confusing as contract jargon. If you're struggling to manage contracts across Word, email, shared drives, eSignature platforms and Excel, it might be time to consider all-in-one contract automation.
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How do you define agreement?
An agreement is a promise or arrangement between two or more parties to do, or not do, something. It’s usually informal and sometimes unwritten (but not always). Some examples of agreements include a letter of intent, or a confidentiality agreement that precedes a commercial discussion.
Agreements like these are based on trust, and aren’t legally enforceable in court or with arbitration – so if one party doesn’t do what they’ve said they will (for example if the builder or volunteer don’t turn up), the other party likely can’t seek a remedy or enforcement through the courts.
What's the difference between an agreement and a contract?
Like an agreement, a contract is a formal arrangement between two or more parties to do, or not do, something. But its terms and conditions are legally enforceable - perhaps in court or through arbitration. That means if someone breaks them, the other party can seek legal redress. Contracts are valid if they contain all the required elements of a contract, and once all the parties have accepted the terms (which usually means signing the contract).
Contracts always involve “consideration” i.e. something changing hands between the parties. It’s usually money, but can also be other goods and services. Agreements are often agreements - i.e. non-binding - due to a lack of consideration, primarily.
Contracts also have certain elements which must appear to make them legally binding and enforceable. You can explore contract requirements in more depth, but in a nutshell these are:
In the UK
- Offer and acceptance
- Consideration
- Intention to be legally bound
- Contractual capacity
In the US
- Offer and acceptance
- Awareness
- Consideration
- Capacity
- Legality
So if something is called an agreement but has all of these elements present, it’s actually a contract, and its terms and conditions are enforceable.
What's a legally binding contract?
A legally binding contract is a contract that fulfils and contains all the elements of a contract, meaning it can be relied upon and enforced in court. As discussed above, if a particular document lacks one or more of the vital elements that make it a contract, then it may well still be a useful agreement, but not a legally binding contract.
Contracts and agreements in action
Here’s an (extreme) example of the difference between an agreement and a contract. Let’s imagine you tell your friend Sarah she can come and stay at your house while she’s in the area.
This is an agreement – there’s no consideration changing hands, there are no terms to comply with, you don’t intend it to be legally binding. It doesn’t fulfil the required elements of a contract. So when you later remember that Sarah is a terrible house guest and tell her she has to stay in a hotel instead, she can’t sue you.
But if Sarah gives you a deposit, agrees to pay you some money for each night she’s at your place, and you set out in writing the arrangement in a document you both sign, you may well now have entered into a contract with her.
That’s because you’ve agreed to exchange a service (i.e. a stay at your house) for a consideration (i.e. the deposit she’s paid you) - there’s been an offer and acceptance, both parties have contractual capacity and you’ve indicated an intention to be legally bound.
So if you then tell her she can’t come because you don’t want to put up with her leaving wet towels on the bathroom floor, drinking all the milk and coming home at 3am, she might have recourse to challenge your decision.
Why would you have an agreement instead of a contract?
You might be happy with an agreement if you know the person well and you’re sure they won’t renege on what you’ve agreed (and pick up their towels). And if there’s no money changing hands then an agreement might be a better option – it avoids the hassle of drawing up and agreeing a contract, which would probably be overkill. Agreements are sometimes used to kick off contract negotiations as well (read more about how to negotiate a contract).
If it’s in writing, is it a contract?
Not necessarily. Agreements can be written down, and signed, but that doesn’t make them contracts if they don’t include the elements mentioned above.
Contracts don’t actually need to be written down either – verbal contracts can still be legally binding, as long as they contain all the elements of a contract. For example, if you lend your brother some money so he can buy a new car, and agree that he’ll pay it back in six months’ time, then you may have a verbal contract.
If he then spends that money on something else, or doesn’t pay it back when he said he would, he’s broken the terms of your contract. You may be able to take legal steps to get your money back, despite the fact there’s nothing in writing.
(Obviously having a written contract is preferable in case something like this does go wrong. We have lots of templates available to help you out with this – check out the links further down this post.)
If it’s signed, is it a contract?
Again, not necessarily, for all the reasons we’ve mentioned already.
Contracts must be signed by everyone involved to be enforceable. And if you want to add or change them you’ll also need to make sure everyone agrees. You can find out more about this in our post on how to amend a contract.
Agreements vs contracts: examples
We have lots of templates available for different types of contracts. Here are some of the most common.
- A non-disclosure agreement or NDA – despite being called an agreement, NDAs are often contracts and are enforceable in court
- An employee offer letter – although this isn’t called a contract or an agreement, it is in fact a contract (because it contains all the elements needed, including consideration i.e. a salary)
- A master services agreement – this is another one that, despite being called an agreement, is a contract. That’s because it sets out the consideration, offer, acceptance, and so on that will form part of a business’ relationship with its client
Frequently asked questions
Which is better an agreement or a contract?
If you’re looking for more protection and certainty surrounding your rights and obligation, then a contract is better than an agreement. This is because contracts are legally binding, meaning that they can usually be relied on in court - unlike some other, less formal agreements.
What makes an agreement a contract?
An agreement is not always a contract. An agreement will become a contract when the various elements of a contract have been satisfied. Read more about the essential elements of a contract.
Find out more
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