What is an Agreement?
Among the legal realities that fall short of contracts generally, agreements represent a strong but non-binding connection between parties. An agreement is, in a very basic sense, an understanding between two or more parties. Section 2 of the Uniform Commercial Code (UCC) § 2-1, a statute governing the sale of goods and leases in the United States, defines agreement as "the bargain of the parties in fact as found in their language or by implication from other situations or conduct."
The law’s use of the term agreement is neither precise nor technical. "The law distinguishes between agreements which are legally binding and those agreements which are not," says Atlantic City attorney Robert N. Weinberg. "One of the principle reasons why individuals engage in an agreement that is legally binding is to have the added backing and support from the law that the terms of the agreement will be enforced." In other words, we cannot engage in an agreement with a person if that agreement will not likely lead to a contract. It might not be a contract, but its existence points to an improved likelihood of parties converting it into a contract.
The relationship between agreements and contracts is that of the stone to an arch. A stone is not a contract, it is not legally binding, but it can be used to create one. When you and a friend decide to go to the movies on Friday, you have an agreement. If you buy the tickets the next Day, you have a contract. (A contract is a recognized agreement that is governed by the law . )
The flexibility of the word agreement is best understood by considering the concept of tenders in government contracting, for example. The basic form of government solicitations is known as RFPs—requests for proposals. When businesses receive these, it is common for them to submit tenders to the government. A tender is an agreement with the government to perform the work as set forth in the proposal, commencing on an agreed date.
The intent of a tender is to bind the submitting company to the terms of the proposal for a specific period of time. But it is not binding in the strictest sense. Unless bidders are willing to enter into a formal contract with the agency that incorporates by reference the RFP and other documents, the proposal is simply a bid meant to be as specific as possible with firm details and a corresponding estimate.
An agreement under the law is flexible, but once enhanced into a contract, it becomes inflexible. Business people, attorneys, and courts have the ability to limit or expand the width and breadth of the agreement. RPPPs clearly limit the discussion to a government agency and its proposals. In this example, tenders fall short of full-blown contracts with the government because they extend only in relation to the request, not the vendor’s ability deliver on the request.
Other examples of agreements in our lives include things like shopping lists, "honey-do" lists, charitable contributions, options contracts related to real estate, and other offers, whether oral or written.
What are Contracts?
Contracts, on the other hand, are legally enforceable agreements. The elements of a contract are (1) offer (2) acceptance and creation of a contract, (3) mutual consent, (4) lawful subject matter and (5) consideration. In general, that means that an offer must be made which is accepted and creates a contracy. For example, a person contracts to buy a car by first making an offer to buy the car. If the seller agrees to sell the car at that price to that person, legal obligations are created for both the seller and buyer. The buyer is obligated to pay approximately what he contracted to pay for the car and the seller has an obligation to deliver the car.
Contracts can take many forms. They can be written or oral (verbal). Employment contracts are an extremely common form of a contract entered into every day. Most people enter into dozens of contracts without ever realizing it every day. But only those that meet all of the requirements of a legally enforceable contract can be enforced in a court if one of the parties fails to live up to his/her obligations.
Agreements and Contracts: The Significant Differences
A contract is a special type of agreement that is enforceable by law. So while agreements are the primary basis of contracts, not all agreements are contracts — but all contracts are agreements. The key thing that differentiates fundamentally between the two, then, is enforceability (or, at least, outside of their written terms).
Take, for instance, an example of how a handshake is enforceable even in the absence of a written contract; however, an oral acceptance of terms may not be legally enforceable, because the terms and conditions of the agreement have no legal form that establishes obligations for each party. Essentially, there’s no "Okay, this is what we agreed to" clause to fall back on.
In some cases, there can be a grey area as to whether a piece of paper that contains the terms of an agreement does or does not count as a contract. Recall, an agreement becomes a contract when it has become enforceable by law. Therefore, in some cases, even if the piece of paper includes specific terms, it may still not be a contract.
To illustrate: when a person accepts an offer, but the offeror has made no indication of liability to fulfil the offer beyond the agreement of the accepting party, there is no binding contract.
So to illustrate, a contract must be supported by consideration, and must have the five basic legal elements: offer, acceptance, consideration, capacity, and legality.
An offer and an acceptance are not a contract until the 2nd person gives consideration too. Consideration is the price you pay for someone fulfilling an obligation to you. For instance, Brad offers to sell his pet hamster to Tom for $20. Tom says he’ll buy it. Tom’s promise to pay $20 is sufficient consideration, like Brad’s promise to sell his hamster.
Let’s play out the five elements. Brads offer to Tom: Brad says, "I will sell my hamster to you for $20." Tom’s acceptance: "I will pay you $20 for that hamster." Consideration is the money Tom will pay for Brad’s hamster. Capacity: Tom is an adult and sane. Brad is also an adult and sane and of sound, hamster-loving mind. Legality: Hamsters are not an endangered species. They are not a protected animal. Therefore, it is legal.
Tom has made an agreement, and now we have a contract.
What Happens Legally When You Breach a Contract?
The legal implications of breaching a contract on the other hand are much less subjective. A party which has suffered loss due to a breach of a contract may for example seek damages. In addition, minimising the costs associated with litigation is very attractive too.
A Claim for Damages
Typically, a claim for damages is resolved when the claimant shows that they have suffered some form of loss as a result of the breach and that breach has taken away the benefit of the agreement. In other words if the parties had performed the contract as agreed, the claimant would be better off than they are now.
As an example, consider a party who agrees to pay £10,000 within 30 days in exchange for some electronic goods.
If the goods are not delivered, then the seller may be liable for any damages which could be caused by the breach and the buyer would not be required to make payment. The damages may represnt the money that the buyer would have otherwise generated from the resale of the goods (after deductions for appropriate expenses and profit) had they been delivered. This may be much higher or much lower than the value of the goods to the buyer.
In some instances, it may be necessary to recover the seller’s expectation of profits in order attempt to profit from the breach. With respect to property contracts, it may be appropriate for the innocent party to claim the difference between the market value of the property at the time of breaching the contract and the value after the breach .
Specific Performance
Where money cannot compensate the innocent party adequately, specific performance of a contract (generally by an order of a court) may be considered. An order of specific performance may require the breaching party to complete the contract, most commonly in relation to real property. It is a discretionary remedy and courts will generally only award this where damages would be an inadequate remedy.
Restitution
Repayment of a party’s unjust enrichment where a party is liable to the innocent party for loss, harm or injury may be claimed. In such circumstances, the innocent party will not be claiming damages as such, but rather recovering money which they are owed for services carried out for the benefit of the other party and for which they would otherwise be unfairly enriched.
The Differences
With a mere agreement, if the parties do not perform their obligations there is no legal action for which damages or specific performance may be sought unless the breach is especially profound. Thus, the party aggrieved may well be left with no effective recourse. With a legally binding agreement on the other hand, if the party fails to perform its obligations under the contract there are a whole range of remedies which may be available to assist the aggrieved party.
How Does an Agreement Become a Contract?
At times, an agreement may eventually morph into a contract. A very simple example of this would be an agreement for future employment that was discussed verbally. After a certain period of time in which the employment environment and expectations of each party were tested, it may become necessary to document the agreement in writing. Once the terms are agreed upon and memorialized, the agreement now becomes a contract, as opposed to an agreement. A similar example would be the purchase of goods or services. The verbal agreement may have been for the procurement of a service over a period of time. However, additional contract terms may have been discussed among the parties and notably, consideration may have been paid. Consideration is a legal term that means something is at stake. The law requires that for contracts to exist, there must be consideration on both sides of the agreement; i.e. money, services or goods must be exchanged, or a future promise for consideration. In the purchase agreement example, once the parties exchanged formalized contract terms and good and valuable consideration was exchanged (e.g. a check was given for the goods or services), the agreement then became a contract for the purchase of goods and services. Prior to this formalizing and exchange, the agreement was unenforceable as there was no valid consideration to create a binding contract. To summarize, an agreement will evolve into a contract if sufficiently material terms can be discussed, agreed upon and memorialized in writing and consideration is exchanged.
Contracts, Agreements, and a Lawyer’s Guidance
Distinguishing between an agreement and a contract in daily business and personal dealings requires due diligence and an understanding of the context involved. The following legal advice can help in ensuring legal protection and avoiding disputes when distinguishing between agreements and contracts:
• Take the time to read any document before signing. A contract will often contain terms or caveats that could impact obligations.
• If an agreement has not been reduced to writing and asked about in the context of a formal contract, be sure to clarify that the intent is to create a contract in order to prevent unnecessary disputes later.
• Identify and establish any oral agreements as quickly as possible, including those that do not impact the creation of a contract . Verifying the details of discussions with a witness or in a message could help avoid potential problems later on.
• If attempting to avoid the creation of a contract, be cognizant of any statement or action that may demonstrate the opposite.
• Once a contract has been established, it is important to ensure that the terms are understood and met. Failing to do so may lead to issues related to enforcing the contract unless appropriate legal counsel is sought.
Contracts and agreements are principles at the heart of business and everyday life (e.g., you agree to a drivers’ license when you drive, agree to have your groceries paid for when you go through the checkout line, etc.). There is no uniform approach to addressing agreements and contracts legally. Legal counsel is often needed to ensure legal rights and responsibilities are protected.