What is the Difference Between a Contract and an Agreement?
There was a time when companies could do business with each other by communicating their assent to the terms and conditions of a transaction. Nowadays, agreements and contracts are much more complicated, even though the laws governing them have not changed significantly over the years.
Regardless, for business owners, contracts and agreements are both middle ground to many organizational dealings. It is critical to understand certain key differences, whether you are seeking to enforce or could be in breach.
What is a Contract versus an Agreement?
- An agreement exists where there is a mutual understanding regarding rights and responsibilities among parties to a business arrangement.
- A contract is an agreement between respective parties that creates legally binding obligations.
Requirements for a Legally-Binding Contract
State law governing contracts requires certain elements for enforceability, which include:
- Essentials Regarding the Agreement: Every contract must incorporate an offer, acceptance of that offer by the other party, and mutual consent. There should also be something of value to be exchanged between the party, a legal concept known as “consideration.” There must be an exchange of consideration with a legal purpose. Therefore, it is not possible to enforce a contract that runs contrary to law.
- Requirements Regarding the Parties: Parties must enter into a contract by their own free will and legally be competent to take such action. For example, a person under 18 years old does not have legal competence to contract. The element of free will refers to situations involving coercion or duress, which would make the contract unenforceable.
When is a written contract necessary?
It is always a good idea to get something in writing, for there may be issues in the future without that written instruction. For instance, there are particular contracts that must be in writing to be enforceable, in addition to complying with the above legal requirements.
Circumstances where a written document is necessary include:
- An agreement to accept the debt of another person
- Contracts for the sale of real estate, whether related to improved or unimproved land
- Leases for real estate that exceed one year
- Agreements guaranteeing the results of a medical or surgical procedure
- Subscriptions for newspaper or periodical service
- Satisfaction of a debt for less than the total amount due
- Other contracts as designated by law
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