Difference Between Agreement And Contract

An agreement is an informal understanding between two or more parties, whereas a contract is a legally binding agreement.

Difference Between Agreement And Contract

Contracts and agreements are two legal documents used in the business and personal world. Both are crucial documents that help individuals and entities to define the terms of engagement and protection of the parties entering the agreement. The importance of contracts and agreements cannot be overstated, and their correct use can prevent misunderstandings and mitigate risks in various types of transactions. While the two terms are often used interchangeably, there are distinct differences between agreements and contracts.


An agreement is a promise or understanding between two or more parties on a specific matter. An agreement takes place when two or more parties come to an understanding on the specifics of what they are going to do or agree to do something. It is thereby a kind of arrangement that is not legally enforceable unless the parties involved intend it to be legally binding. Often, an agreement is informal, and parties may choose to rely on trust and mutual understanding rather than written documentation.

Examples of agreements can vary, including verbal agreements like accepting an offer, a handshake deal between two business partners, or a personal agreement between two friends. Legally, verbal agreements can be hard to enforce because of the lack of tangible evidence. However, it is important to note that an oral or written agreement can become a legally binding contract when its terms and conditions can be enforced in a court of law.


A contract is a legally binding agreement between at least two parties, under which each party accepts to provide a benefit to the other in exchange for performance of an obligation. In a contract, once the parties agree upon the specifics of what is expected of each other, it becomes binding. A contract represents the rights and responsibilities of parties and the specific details of the exchange of goods or services. A contract can be verbal or in writing, but the latter format is generally recommended.

Contracts are legally binding and can be enforced in courts of law. The primary function of a contract is to manage legal risk by establishing the terms and conditions of an agreement, protecting the rights of both parties, and reducing the chances of misunderstandings and disputes. Contracts also provide clarity and certainty on the ownership of resources, responsibilities, and legal liability, as well as confidentiality.

In practice, contracts come in different forms. Some common types include employment contracts, rental contracts, sales contracts, partnership agreements, non-disclosure agreements, service contracts, among many others. A written contract should include all the terms and conditions agreed to by the parties, the date of agreement, signatures of the parties involved, and any annexes or exhibits incorporated into the contract.

Key Differences between Agreements and Contracts

1. Legality

One fundamental difference between an agreement and a contract lies in their legal status. An agreement is not binding in a court of law unless it is legally enforceable. On the other hand, a contract is an enforceable binding agreement that parties have voluntarily agreed to abide by.

2. Verification

An agreement can be informal and verbal, whereas a contract is usually written. A contract is often used when dealing with more complex transactions or where a high likelihood of disagreements exists between parties. In such cases, it is wise to have the terms and conditions established through written documentation that parties can rely on.

3. Legal consequences

An agreement may have no legal consequences if one of the parties breaches the terms of the agreement. Conversely, If one party breaches a contract, they will legally bear the consequences of their actions, such as being sued and ordered to pay damages to the other party.

4. Specificity

An agreement is generally not as specific as a contract. An agreement typically outlines general terms while a contract is more comprehensive and detailed. In a contract, each party's rights, responsibilities, and expectations are clearly defined and agreed upon, making it easier to manage risk and prevent disputes.

5. Timeframe

Agreements may be binding or non-binding, can be created quickly and with minimal effort. In contrast, a contract is usually a more comprehensive document that takes more time to prepare and negotiate. A contract is a formal agreement that requires a lot of time, effort, and expertise to prepare to ensure that all parties' interests are adequately protected.


In summary, while agreements and contracts may appear similar, their differences are rooted in their legal standing, verification, specificity, legal consequences, and timeframe. It's important to understand the distinction between the two to avoid any misunderstandings or disputes down the road. By having a written contract, parties can ensure a clear understanding while protecting their legal rights and interests. Ultimately, knowing when to use an agreement vs. a contract is essential in mitigating risks, ensuring compliance, and building a solid foundation for your relationships and transactions.