When talking about legal documents, two words are bound to come up: agreement and contract. These terms are often used interchangeably, but they aren’t the same thing. In short, all contracts are agreements, but not all agreements are contracts.
Let’s skip the riddles and find out which is which in this blog.
Let’s talk legal!
Before we jump into a discussion of contract vs agreement, let’s look at the legal definitions.
What is an agreement?
An agreement is a promise or arrangement between two or more people regarding a common intention.
“Agreement” means that the accomplishment relies solely upon the free will of the parties. In other words, you can define agreement by saying that it’s any arrangement about something between two or more parties with a common goal in mind. An agreement is informal, with no legal implications.
What is a contract?
A contract is an agreement between two or more parties that creates a mutual obligation and is enforceable by law.
The definition of a contract suggests that it takes an agreement to a new level, with specific rules and boundaries that are legally binding. Signing a contract means that you need to adhere to its terms; otherwise there will be legal repercussions.
What’s the difference between a contract vs agreement?
In a nutshell, the main difference between a contract and an agreement is that a contract is legally binding while an agreement isn’t. A contract includes specific terms and regulations which can be enforced by law, while the only requirement for an agreement is that all parties understand their rights and responsibilities.
The elements of a contract
For an agreement to turn into a contract, it has to include the following things:
Offer & acceptance
First and foremost, someone has something to offer, and another party accepts that offer.
Each party enters the contract of their own free will. They agree to the same terms and have equal knowledge and understanding of the contract’s terms.
Consideration is something of value exchanged by the parties involved, such as money, knowledge, or resources. Both sides must provide consideration. If only one party provides something, this is considered a gift, not a contract.
Each party should not only understand the contract’s terms and conditions; they have to be competent to sign it. In other words, minors, mentally incapable people, or people under the influence of alcohol or drugs cannot sign a contract. If a party is incompetent, this is a valid reason to terminate the contract.
Hypothetically, you can draw up a contract about anything you want. However, a court won’t enforce a contract if its subject matter isn’t legal. In other words, a contract shouldn’t contradict a country’s laws or public policies.
When is a contract necessary?
A contract is necessary when you enter into an arrangement with another party and want to protect your rights. Of course, it’s up to you whether you use a contract or agreement, but in some situations, a contract is a must-have for protecting both sides in the deal.
Some examples are:
- Giving loans or taking on debt
- Selling or buying real estate
- Leasing or renting a property
- Providing or receiving medical and surgical procedures
- Other situations that involve money, resources, intellectual property, or other things that are of value to the parties involved
Putting the contract vs agreement conversation aside, what are some real examples of agreement and contract use?
When two parties make an agreement, they don’t usually aim to make it legally binding. Technically speaking, any arrangement that includes two or more parties and a common intent is an agreement. An example of an agreement between two parties is when one person offers to share the cost of rent, a second person accepts it, and they become flatmates. Or else, you can go into more depth and create The Roommate Agreement, as Sheldon did in The Big Bang Theory.
Agreements are widely used by people to handle day-to-day situations, as well as by international companies and countries. For example, the United States and Japan once used a gentlemen’s agreement (based on honor) to handle migration between the two countries.
Unlicenced betting pools, where people agree to pay the price to enter a competition, are also agreements. The terms of the bets can be declared verbally or even be left unstated if they are common knowledge. People who take part in the bets are presumed to agree to these rules.
Because agreements aren’t legally binding, there are no legal repercussions if one person fails to comply with the terms. If two people agree to have dinner and one of them doesn’t come, meaning that the other person loses valuable time, there’s nothing to be done in legal terms.
Many legal documents called agreements are actually contracts. Let’s look at some common business contract examples so their names won’t fool you:
- A non-disclosure agreement (NDA) or confidentiality agreement is an example of a contract between two or more parties that prevents sharing specific information with third parties. NDAs are commonly signed between employees and employers or businesses and potential joint ventures. With an NDA, you mitigate the risk of sensitive information leaks and protect your business.
- A master service agreement (MSA) is a contract example between two parties concerning an ongoing project or business relationship. An MSA creates a flexible and convenient set of guidelines for both sides as they carry out a project and make decisions along the way.
- An employment contract describes the rights, responsibilities, and obligations of employees and employers and serves as a guide for resolving potential conflicts.
- An end-user license agreement (EULA) is a contract between a software developer and users that purchase their software. Many EULAs are digital and “signed” when you tap or click to show your consent. Remember that set of rules and regulations you had to read when you bought a new phone, and then you tapped “accept”? That was an end-user license agreement.
- A purchase order is a contract between a supplier and a buyer. It documents a number of goods along with a price, delivery date, terms of payment, and other details.
Contracts appear in many forms and serve different purposes, but they all exist to protect each party’s rights.
Modern contracts and CLM software
Modern contracts are mostly drafted, approved, and signed online. Nevertheless, the contract signing process is often lengthy and tedious. Contract lifecycle management (CLM) software is a key tool in your business arsenal for ensuring a smooth workflow and fast turnaround and mitigating risks. CLM covers all stages of a contract’s journey, from contract request to its execution and renewal.
Digital contract management with a CLM platform like AXDRAFT lets you establish an easily accessible knowledge base, draft contracts from anywhere, and collaborate with partners and third parties across thousands of miles, all in a matter of minutes.
In addition, features like version control, notifications, and analytics help you keep track of contract integrity, deadlines, and the performance of each contract.
The bottom line
Developing a contract can feel like entering a dark forest if you don’t have a legal background. Automated contract management is the best way to ensure efficient and competent contract development.
AXDRAFT’s CLM software is designed to ensure a fast, error-free, and convenient contract management workflow, whatever your legal skills. With our easy-to-use platform, you can put worries about handling legal documents behind you and be sure that you have the perfect contract for each of your deals.
If you’re still finding your way around the legal forest, we invite you to check out our guides to common topics in the business. Alternatively, schedule a demo to find out what AXDRAFT could be doing to give you real peace of mind with your contract process, starting today!
No. An agreement is based solely on the free will and consent of its parties, meaning there are no legal boundaries or rules to follow.
An agreement only requires the common intent and mutual understanding of two or more parties. A contract includes a few other elements and is legally binding.
An agreement is often the first stage in the contract development process. An agreement can be referred to in a contract, but an agreement itself isn’t legally enforceable without the contract.
Any agreement that can’t legally force someone to comply with its terms. Some simple examples are an agreement to take out trash in turns by roommates or to go out to dinner with a friend. While you may agree to do these things, there’s nothing to be done in legal terms if you don’t uphold your side of the deal.
An agreement becomes a contract when it includes such elements as offer and acceptance, mutual consent, consideration, competence, and legal purpose.
Agreements that don’t include such elements as mutual consent, consideration, competence, and legal purpose can’t be enforced by law. If even one of these elements is missing, this is a valid reason for a court not to enforce the contract.