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Contracts Vs Agreements - What’s the real difference?
The terms agreements and contracts are often used interchangeably. Yet, agreements are not always contracts, though contracts are always agreements.
Confused? Do not worry. Here, we look at both so that you can see why we always prefer a contract over an agreement even though they can look the same. We wager you will end up wanting to use the contracts at Contractbook over an agreement, time and time again.
What is a contract?
It may sound basic, but fully understanding a contract definition is fundamental if you want to compare an agreement with a contract to grasp the crucial differences between them. Briefly put, a contract is a legally binding agreement between two or more parties that sets out obligations, requirements and responsibilities of those involved. The terms and conditions outline criteria that must be met (or not met) and there could be legal consequences if those criteria are not met in a breach of contract. Critically, a contract is legally enforceable if certain elements of a contract are present. Those are:
- a signature by both parties free of duress or fraud (commonly known as mutual assent)
- Offer and acceptance
- Consideration (i.e a value is placed on the exchange in question)
- Legality (the contract delineates a lawful transaction within its relevant jurisdiction.)
- Capacity (both parties must be capable of understanding the terms and conditions outlined in the contract)
What is an agreement?
An agreement, in comparison to the definition of a contract, is a mutual understanding regarding the rights and responsibilities of the parties involved. As a result, an agreement is far more likely to be informal and sometimes even unwritten. They are often based on trust and as a result are not always legally enforceable in court. So, if the agreement is not abided by on one or both sides, the other party may not be able to seek legal remedy.
That is not to say that agreements cannot be written down or explicit in what has been agreed to within it. Agreements can be contracts. However, if one of the above elements is not present, it is then that they are not legally enforceable.
So, in some cases, confusion can arise as it could be that the term agreement is wrongly used in relation to what it actually is. In reality, if it has all elements of a contract, and it is legally enforceable in the courts, and it is signed by all parties involved, it is a contract (just with a different name).
What is the difference between contracts and agreements?
The key difference between contracts and agreements - as briefly alluded to above - is that a contract is a form of agreement that is always legally enforceable. An agreement can be a contract, as long as it has all the elements of a contract that makes it enforceable. So in the case of Non Disclosure agreements or Sales agreements, they are legally enforceable because they hit all the necessary criteria to make them legally binding.
That is why we are so passionate about contracts - even when they are called agreements for historical reasons. Because they are legally enforceable, they can become an asset that a company can rely upon time and time again.
Contracts vs agreements? The pros and cons of both
There are benefits and drawbacks to contracts and agreements when you compare them. That being said, if a contract is worded well and structured correctly - as well as completed with all elements necessary - the benefits of it should far outweigh the advantages that an agreement may bring.
- Legally enforceable
- Can be quick if a template is used
- Makes responsibilities clear
- Outlines value, financials or consideration
- A written contract holds data that can help inform future business decisions
- Administrative burden (largely eradicated through Contractbook)
- Can be informal
- Prevents future misunderstandings
- A written agreement holds data that can help inform future business decisions
- Not always legally enforceable
There is no doubt in our mind that if you have a choice between signing a contract or coming to an agreement, you should always choose the contract. Agreements are fine if you have a solid trust between two parties and perhaps at times where there is no real value to the agreement itself. However, they leave you open to not being able to seek legal remedy should the agreement go awry if it is not legally enforceable.
A contract will always be an asset as it clearly outlines all terms and conditions required of both parties involved, and adhering to those conditions is a legal obligation. If those conditions are not fulfilled, a party can be in breach of contract and therefore the other party has the ability to seek legal resolution.