Agreements vs. Contracts - Learn the difference | A complete guide

Agreements vs. Contracts: What’s the Difference?

Referring to agreements as contracts is like referring to a business plan as a business proposal or calling sales quotes as sales proposals. Each term is distinct, and so is its meaning. But, sometimes, these terms are used interchangeably in informal arrangements without giving much thought. Despite having key differences, agreements vs. contracts also travel in the same boat. 

Whether you are a big or a small business, a professional or a student, it is important to demarcate the application of terms ‘agreements’ and ‘contracts.’

Read on and gain complete knowledge on this.

Table of contents
Definition: Agreements vs. Contracts
Key elements: Agreements vs. Contracts
Benefits: Agreements vs. Contracts
Comparison chart: Agreements vs. Contracts
How to create concrete agreements and contracts? 
Summing it up | Key takeaways

Definition: Agreements vs. Contracts

What is an agreement?

Agreements, also known as handshake or gentlemen’s agreements, are formed on the basis of mutual understanding between two or more parties.  It can be in writing or verbal. 

What is a contract?

Contracts are legally binding agreements made between two or more parties for carrying out certain acts. Enforceable contracts can be challenged under the court of law. Therefore, it is always recommended to have written contracts to protect the interest of parties.

Key elements: Agreements vs. Contracts

Let us understand how agreements and contracts are made and their key elements.

What are the essential elements of an agreement?

Offer and acceptance – An agreement is formed when an offer is made by one party and accepted by another party. 

Promise – An offer, when accepted, becomes a promise. 

Consideration – It is the price or value exchanged for a promise.

Agreements, therefore, are formed based on a common understanding often called ‘meeting of the minds.’ These are non-assertive informal arrangements where a promise or terms of the agreement is honored out of moral obligation.

For example, a ten-year-old boy buying a toy for $12 from a toy store is an agreement.  Here, the boy proposes/offers to buy a toy; the store owner accepts the offer which makes it a promise. The consideration for both was a toy and money, respectively.

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What are the essential elements of a contract?

Offer and acceptance – Like agreements, contracts are also made when one party proposes an offer, and another party accepts it, and a promise is made to abide by the terms of the contract.

Mutual consent – No party can be pressured, forced, or influenced to sign the contract. Mutual assent confirms that both parties willfully agree to the same terms of the contract. If one or both parties are not bound or not serious, the contract doesn’t exist. 

Consideration – A valid contract demands an exchange of something of value between the parties. The value may be goods, money, or services, but both parties must give something. When a promise is freely made by a promisor without the intention of receiving anything, like a gift, it is not a contract, and there is no enforceability. 

Competence – Both parties should have a ‘sound mind’ and legal capacity to comprehend this written document. It requires that neither party can be minors, under the influence of alcohol or drugs, or mentally challenged that would inhibit them from understanding the terms of a contract. Contracts made in such circumstances are voidable and can’t be challenged under common law

Legal purpose – Contracts should be compliant with the contract laws. A contract made on illegal and unlawful grounds becomes void. For example, a contract to smuggle drugs for money is considered to be void as it is forbidden by law.  Read here to know more about making legal contracts.

To add an extra layer of precaution, you can draft a memorandum of contract before drafting and signing the final contract. It helps you and other stakeholders review the terms and conditions of the contract before the final signatures.

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How an agreement becomes a contract?

A valid contract is an agreement with legal obligations. It must entail all the above-mentioned elements of a contract – offer and acceptance, capacity, wilful consideration, free consent, certainty, legal commitments, lawful objects, and no scope of being void.  

All contracts are agreements, but all agreements are not contracts.

When an agreement becomes a contract.

Benefits: Agreements vs. Contracts

What are the benefits of agreements?

  • Agreements work great for informal set-ups and ordinary favors. It is based on ‘meeting of the minds’ and mutual trust between the parties. It allows room for flexibleness to fulfill the terms of the agreement.
  • An agreement doesn’t always have to be a written agreement, which enables faster churn out of agreed stipulations. 
  • It is a more feasible option especially when executing a specific type of agreement is less troublesome than drafting one.
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What are the benefits of contracts?

Protects and acts as a guide to the court of law –  Though verbal contracts can be challenged under the court of law, the Statute of Frauds requires some types of contracts in written documents, like contracts for the sale of real estate, contracts of purchase/sale of goods and services, etc. 

Binding contracts can be disputed under common law when there is a breach of contract. 

If the parties want to avoid lawsuits, they can also opt for a less expensive, shorter, and faster process of arbitration to resolve the issue as per the contract agreement. 

Provides assurance – It makes the parties enter into legal obligations to fulfill their commitments as stated in the written contract. 

Legal support – If there is a breach of contract, the involved parties remain protected under the contract law. They can seek legal and professional advice and can get lawyered up.

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Comparison chart: Agreements vs. Contracts

Grab a quick bite – Here are the key differences between agreements and contracts.

Essential elementsPromise (offer + acceptance) + ConsiderationAgreement + Legal enforceability
Preference – Verbal or writtenMostly casual and verbalPreferred to be written and registered
Agreement typeInformalFormal
ApplicationFor less important transactions where words are enoughFor grave matters where a breach of contract can be detrimental to the parties
Legally bindingNoYes

How to create concrete agreements and contracts? 

Revv, a smart document automation and eSignature software, plays a key role in contract lifecycle management. Packed with advanced features, Revv empowers users to create trustworthy and solid agreements and various types of contracts. 

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  1. Template library – Choose a contract template from Revv’s professionally vetted template library. Customize the document using its rich drag and drop builder.
  2. Collaboration – Ditch the tedious email exchanges and collaborate with other team members or users within the document through notes, comments, and tag them with the @mention feature.
  3. eSignature – Add eSign blocks for binding contracts and send them for signatures in just a few clicks.
  4. Obtain consent on documents – Revv offers an option of ‘Send for acceptance’ feature for the documents that can be closed with the consent of recipients.
  5. Analysis and tracking – Monitor activity on documents with real-time analytics – who opened it, signed it, etc., and take necessary steps.
  6. Automate internal approval on documents – Revv facilitates setting up rules and criteria for workflows to ensure all important business documents are sent for internal reviews and approvals before sending them to external parties.
  7. Business apps integration – Seamlessly integrate Revv with other business apps like Zoho, Google Drive, Zapier, Slack, and many more, and manage documents processing completely. 
  8. Integrate payment – Collect instant, online payments through Stripe integration within your documents.
  9. Enable artificial intelligence – Analyze documents with artificial intelligence using Revv’s Metalens feature and extract data and intent from business documents to scale up business processes.

Want to take the hard work out of drafting contracts? Try Revv’s contract templates

Summing it up | Key takeaways

Agreements and contracts are not two sides of the same coin. Their application differs depending on the type of transaction.

Use them based on the criticality of the situation and the type of business setting.


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Seema is a Product Expert at Revv. She believes in the power of words and storytelling. She spends most of her time in creating exciting and knowledgeable content. When not working, you can often find her watching adorable pups videos, dancing for no reason, or experimenting with recipes.

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