An early saying goes, “All contracts are agreements, but all agreements are not contracts,” implying that an agreement is distinct from a contract. Without realizing it, we engage in hundreds of agreements every day that may or may not legally bind us.
Key Takeaways
- Contracts are legally binding agreements between parties with defined terms and conditions, while agreements are informal arrangements that may not be enforceable by law.
- Contracts require offer, acceptance, and consideration, whereas agreements may not have such formal elements.
- Breach of a contract can result in legal consequences, while breaking an agreement may not lead to legal penalties.
Contract vs Agreement
The difference between a contract and an agreement is that a contract is legally enforceable in a court of law due to its terms and components. Conversely, an agreement is any understanding or arrangement established between two or more people.
A contract is a written agreement between multiple parties to do so or refrain from doing something. However, its terms and conditions are legally binding and can be enforced in court or through negotiation.
That is, if someone violates them, the other party has the right to seek a legal solution. Contracts are legal if they include all the essential contract components and if all the parties have agreed to the conditions (that includes signing the contract).
An agreement is a broad notion that encompasses any settlement or arrangement between two or more individuals regarding their rights and duties toward one another.
These unofficial arrangements are sometimes referred to as “gentlemen’s agreements,” in which compliance to the terms of the agreement is based on the honour and integrity of the individuals involved rather than on external mechanisms of enforcement.
Comparison Table
| Parameters of Comparison | Contract | Agreement |
|---|---|---|
| Definition | A written agreement between two or more parties that is legally binding due to its contents and features. | A commitment (informal) between two or more parties that is not legally binding. |
| Elements | Agreement and enforcement | Offer and acceptance |
| Legal requirement | Establishes a legal responsibility | It does not imply a legal duty. |
| Documented on paper | A contract is written and recorded | An agreement does not have to be written or recorded |
| Legal implications | A contract is legally binding, and the provisions of the contract may be enforced in a court of law. | An agreement lacking any necessary contract components has no legal force. |
What Is Contract?
A contract is a legally enforceable agreement that specifies and controls the rights and responsibilities of the parties to the agreement. When a contract satisfies the criteria of statutory provisions, it is legally enforceable. A contract entails the exchange of products, services, money, or a commitment to trade any of these. In the case of a contract violation, the aggrieved party may seek legal remedies such as monetary damages or contract cancellation.
A contract must include the following components: adequate and unconditional consideration, offer and acceptance, capacity, lawful object, free consent, and intention to create legal obligations. Terms and representations are included in a contract. Terms are contextual assertions that can become legally binding, while representations are declarations that may lead to a contract but are not contractual terms.
If some of these requirements are not satisfied, the contract is void and thus cannot be enforced against the other party. Contracts can be ended in four ways: performance, violation of contract, and termination by another contract.
What Is Agreement?
An agreement is a commitment or arrangement between two or more people to do or refrain from doing something. It is the convergence of thoughts at a certain point. It might be on corporate, commercial, or domestic issues. It is casual and, at times, unwritten.
Agreements like this are founded on trust and aren’t judicially enforceable or through dispute – thus, if one party doesn’t do what they claimed to do, the other party may not be able to seek redress or compliance through the courts.
When an agreement is rendered legally binding and meets the three requirements, it becomes a contract. When people engage in an agreement, they establish the terms and conditions of the agreement, although, in certain contracts, the terms and conditions are imposed by law. Two examples of agreements are a letter of intent or a confidentiality agreement that precedes a business discussion. Essentially, the agreement has two main aspects-
Offer: A person makes an offer when he or she conveys to another person his or her readiness to accept responsibility in return for a promise, act, or abstention. The offer that is made must be explicit, i.e., the conditions must be specified. Furthermore, the offer should be conveyed to the offeree, and it is deemed complete when they receive it.
And Acceptance occurs when the offeree expresses or implicitly expresses his/her willingness to receive or do anything presented to him/her by the offeror. It must be disclosed to the person who makes the offer in a specified manner and within a reasonable period. It must be unequivocal and complete.
Main Differences Between Contract And Agreement
- A contract is defined under section 2 (h) as “An agreement enforceable by law is a Contract”. However, an agreement is defined in section 2 (e) as “Every promise and every combination of promises constituting the consideration for each other is an agreement.”
- When three criteria of a legally binding agreement are satisfied, a contract becomes enforceable, but an agreement can be worked on when two mindsets meet at a specific point.
- Contracts are drafted and recorded. However, an agreement does not have to be in writing.
- The people are legally obligated to carry out their responsibilities under the contract. But the agreement does not legally bind any of the parties to fulfil.
- A contract can be considered an agreement, but an agreement cannot be considered a contract.
- https://heinonline.org/HOL/LandingPage?handle=hein.journals/tndl83&div=13&id=&page=
- https://heinonline.org/HOL/LandingPage?handle=hein.journals/oxfjls6&div=17&id=&page=
Last Updated : 13 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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