In both business and legal contexts, the terms “contract” and “agreement” are often used interchangeably, but they have quite clear meanings. Not understanding the difference between contracts vs agreements can leave us using the wrong one and leave your startup being unable to enforce what should have been a contract. Here are the key differences between the two:
What’s The Actual Difference?
- Contract: A contract is a legally binding agreement between two or more parties that creates an obligation to do or not do a particular thing. The legally binding part involves the exchange of promises, and if one party fails to fulfill their contract obligations, the other party may seek legal remedies. Generally the remedies are either set out in the contract or
- Agreement: An agreement is a broader term that refers to a mutual understanding between contract parties about their rights and obligations. Not all agreements are legally enforceable; a contract is a specific type of agreement that meets the necessary legal requirements.
Contracts Vs Agreements: How Do They Stack Up For Enforceability
- Contract: A contract is generally enforceable by law. It contains specific elements, such as an offer, acceptance, consideration, legal capacity, and legality of purpose, which make it legally binding.
- Agreement: An agreement may or may not be legally enforceable. Some agreements lack the essential elements required to create a legal obligation, and therefore, they may not hold up in court.
In Terms Of Legal Requirements:
- Contract: To be valid, a contract must meet certain legal requirements, such as a clear offer and acceptance, consideration (something of value exchanged), the intention to create legal relations, legal capacity of the parties, and a legal purpose.
- Agreement: An agreement may be a broader term that encompasses both legally binding contracts and non-binding agreements.
How They Stack Up
- Contract: Contracts are typically more formal and detailed, outlining specific terms and conditions that are legally enforceable.
- Agreement: Agreements can be formal or informal. Not all agreements rise to the level of a contract; informal agreements may lack the necessary legal elements.
When it comes to contracts vs agreements it’s important to understand that while all contracts are agreements, not all agreements are contracts. A contract is a specific type of legally binding agreement that meets certain legal criteria. Agreements, on the other hand, can be legally binding or non-binding, depending on the presence of essential legal elements.
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An Example of Contracts Vs Agreements
Below we’ve put two very slimmed down examples of what a contract would look like next to an agreement. Keep in mind that real legal documents would typically be more detailed and specific. These are just to demonstrate the outline of these documents.
Short Sales Contract:
Parties: This Sales Contract (“Contract”) is entered into on [Date] (“Effective Date”) by and between:
Seller: [Legal Name of Seller] [Address of Seller]
Buyer: [Legal Name of Buyer] [Address of Buyer]
Terms:
- Product/Service: The Seller agrees to sell, and the Buyer agrees to purchase, the following product/service: [Description].
- Price: The total purchase price is [Amount], payable as follows: [Payment Terms].
- Delivery: The Seller shall deliver the product/service to the Buyer on or before [Delivery Date].
- Warranties: The Seller warrants that the product/service is free from defects.
- IP Considerations: The Seller and the Buyer agree to these Intellectual Property clauses
- Liability: The level of liability that is applicable if there is a breach of the contract.
- Breach Clauses: What constitutes breach of this contract or where contract termination is allowed.
- Governing Law: This Contract shall be governed by the laws of [Jurisdiction].
Signatures: _______________________ Date: __________ [Signature of Seller]
_______________________ Date: __________ [Signature of Buyer]
Short Sales Agreement:
Parties: This Sales Agreement (“Agreement”) is made and entered into on [Date] (“Effective Date”) by and between:
Seller: [Legal Name of Seller] [Address of Seller]
Buyer: [Legal Name of Buyer] [Address of Buyer]
Terms:
- Product/Service: The Seller agrees to sell, and the Buyer agrees to purchase, the following product/service: [Description].
- Price: The total purchase price is [Amount], payable as follows: [Payment Terms].
- Delivery: The Seller shall use reasonable efforts to deliver the product/service to the Buyer on or before [Delivery Date].
- Warranties: The Seller may provide certain warranties regarding the product/service. However, these are not legally binding guarantees.
- Governing Law: This Agreement shall be governed by the laws of [Jurisdiction].
Signatures: _______________________ Date: __________ [Signature of Seller]
_______________________ Date: __________ [Signature of Buyer]
Contracts Vs Agreements: Where They Stand
Sales Contract:
- It includes specific legal terms and conditions.
- The warranties provided by the Seller are legally binding guarantees.
- The document is more formal and detailed.
- The intent is to create a legally enforceable obligation.
Sales Agreement:
- It is an agreement without the same level of formality.
- Warranties, if any, may not be as rigorously enforced.
- The document is less formal and may lack some elements required for a contract.
- It may be more flexible and suitable for non-binding or informal arrangements.
At the end of the day, the startup sales contract is more likely to be legally enforceable due to its formal and detailed nature, while the sales agreement may be less binding and more focused on expressing mutual understanding. The distinction lies in the intent and the presence of specific legal elements.
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When To Use A Contract And When To Use An Agreement
The decision to utilize either a contract or an agreement hinges on the intricacies of the transaction, the requisite formality, and potential legal ramifications. More often than not when it comes to running your startup contracts should be used for most things. Although you never want to have to enforce a contracts clauses the ability to do so can act as a deterrent. With this in mind there are circumstances where an agreement would be sufficient.
Contracts are typically preferred when dealing with complex transactions marked by substantial obligations, responsibilities, and risks. Their detailed nature provides a comprehensive framework suitable for high-value transactions, offering clarity and protection. Contracts are ideal for situations where legally binding commitments are necessary, especially if non-compliance could result in legal consequences. They are well-suited for engagements involving specialized services or industries, establishing clear expectations and responsibilities in long-term relationships or partnerships. Moreover, contracts are apt when confidentiality or non-disclosure clauses are critical components.
If you’re wondering where to use agreements, agreements find their place in simpler transactions with lower associated risks, as well as informal or short-term arrangements. They offer flexibility and are well-suited for expressing mutual understandings without the strict legal enforcement characteristic of contracts. Agreements are often used in preliminary negotiations or when parties seek a document that is less rigid and more negotiable. Regardless of the choice between a contract and an agreement, seeking legal advice is advisable to ensure the document effectively safeguards interests and complies with relevant laws, taking into account industry practices and the dynamics of the relationship between parties.
