The terms “agreement” and “contract” are used interchangeably, but legally speaking, they are two different things. An agreement is simply an understanding or arrangement between two or more parties. A contract is a specific agreement with terms and conditions that are enforceable court.
What constitutes an agreement?
An agreement is usually an informal arrangement, often unwritten, between two or more parties. The parties simply consent to do or refrain from doing something. Nothing requires the parties to adhere to the terms of the agreement aside from the honor system.
How is a contract different?
A contract, on the other hand, is a formal arrangement between two parties that’s enforceable either in court or through arbitration. Contracts are valid when both parties accept the terms.
An exchange of goods or services for “consideration,” which is usually money but can be anything of value, is required for the arrangement to be legally binding. The parties can be sued for failure to meet the obligations of the contract.
For example, you offer to let your friends stay at your house while they’re in town. That’s an agreement because there’s no exchange of consideration for use of your house, and there are no terms or conditions written out for them to comply with. Your friends cannot sue you for changing your mind and making them pay for a hotel.
However, if your friend gives you a deposit and agrees to pay you $50 per night to stay at your house, that’s a contract because you’ve agreed to exchange a service (use of your house) for consideration ($50 per night). Your friends would have grounds to sue if you accepted their payment but didn’t let them stay at your house. A judge could conceivably order you to let them stay at your house, or more likely, pay them reasonable costs associated with their hotel stay.
It’s important to note that, like agreements, contracts don’t have to be in writing unless they’re for transactions involving real estate, marriage, or requiring more than one year to complete, depending on the state. However, it’s best to get written contracts so you have recourse to go to court if one party doesn’t meet their obligations.
Why would you use an agreement instead of a contract?
Informal agreements don’t meet the definition of a contract. You might be comfortable with a simple agreement if you know and trust the other party. You might also use an agreement instead of a contract when a contract doesn’t seem worth the trouble. You’re unlikely to need a contract to drive your friend to the airport in exchange for $10 for gas.
The benefits of using a contract
While agreements are fine among friends for ordinary favors, contracts are standard practice in business. Contracts make clear what each party has agreed to, set deadlines, and outline the options for enforcing the contract if the other party doesn’t fulfil their obligations. Insisting on a contract isn’t a sign that you distrust the other party. Contracts help establish trust when money changes hands.
Carefully spelling out the terms and conditions of a contract provides the court with a guide for deciding the case if one party alleges a breach of contract. This helps the court decide the merits of the complaint and determine the proper remedy if one party fails to meet their obligations.
Agreements and contracts are similar but definitely not the same thing. Both have their advantages and disadvantages and are useful in different situations. Knowing what each is best suited for will help you decide when it’s time to use a contract and when it’s OK to rely on an agreement.
For more information, check out our complete guide on how to write a contract.