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Agreement vs. Contract: What’s the Difference?

A team of people discussing the difference between agreement vs. contract

Generally, people tend to use “agreement” and “contract” interchangeably, but is there a true differentiator? In reviewing agreement vs. contract terminology, their similarities and differences are critical to legal enforceability.

A contract is an agreement, but an agreement is not always a contract. An agreement can be informal or it may be written; a contract may be verbal or written, but a contract will always be enforceable if it contains certain requirements. Modern contract management software takes an agreement and puts in the legal requirements that formally turn an agreement into a contract.

What is an agreement?

An agreement is a “ manifestation of mutual assent by two or more persons to one another.” An agreement may be as simple as two neighbors arranging to trade lawn-care equipment, or as complicated as a Terms and Conditions (Ts&Cs) clickwrap agreement for your latest phone app. 

An agreement is the meeting of two minds to a common intention, made with an offer and an acceptance. To use the Ts&Cs example, the app is offering to allow the user to access their services under certain conditions, and the user accepts by clicking the “Accept” button, which lets them download the app.

What is a contract?

‌A contract is an “agreement between private parties creating mutual obligations enforceable by law.” There are specific elements required to create an enforceable contract:

  • Mutual assent, or a “meeting of the minds.”
  • Offer and acceptance.
  • Consideration.
  • Capacity to contract.
  • Legality of contract.

‌The requirements of mutual assent and offer and acceptance are similar to that of an agreement. Consideration means that the exchange is made for adequate compensation. A good example is an employment contract. The worker agrees to work a specified job in exchange for a stated rate of payment.

Capacity simply means that the parties are legally capable of entering into a contract. Depending on the jurisdiction, age or mental disability may prevent some individuals from entering into a contract or may allow the contract to be voided later. If one party is aware of the other’s lack of capacity, there are types of contracts that cannot be entered into.

No court will enforce a contract that is not legal. Although parties can make contracts for just about anything they wish, the courts will not enforce performance for acts that are illegal or contrary to public policy. 

Agreements vs. contracts: The same, but different

An agreement is a prelude to a contract. The “meeting of minds” that defines both an agreement and a contract is an essential part of both. One of the valid reasons to cancel a contract is a mutual mistake.  This can occur when—despite both parties believing they agree on a fact or clause—one or both of them are wrong.

Both an agreement and a contract require that the parties be on the same page when it comes to who is doing what, who gets what in return, and when any necessary actions will take place. Both agreements and contracts are recognized to be arrangements between two or more parties to perform certain responsibilities.

The critical difference is that contracts are recognized as legally enforceable promises to perform. Some agreements—such as clickwrap agreements—have been held to be legally enforceable, but those agreements must have certain legal terminology that indicates the parties’ intent to enter into a binding agreement.

‌Making an agreement into a contract

Taking an agreement or a basic contract and upgrading it into a digital contract is not as easy as A-B-C, but it doesn’t have to be too difficult. Modern contract lifecycle management (CLM) takes basic agreements and contractual details and melds them into a workable contract for the end-user.

A modern contract handled by CLM contains several smaller formal agreements that need to be merged into one contract.  For instance, the overall contract may contain a T&C agreement for a particular app to be used by both parties. That T&C needs to be folded into the contract, but it is also a standalone agreement used by the app developer.

‌A nondisclosure agreement (NDA) is another kind of agreement that is included or attached to a contract. NDAs are not contracts, because there is usually no consideration—one party is not given any bargained-for exchange—but they are legally enforceable if they are worded correctly. CLM software will append NDAs to a contract as necessary for the signers.

Other things that may need to be added to an agreement to make it a contract include:

  • Boilerplate clauses. Everyone has seen standard contracts that appear to contain the same language as every other contract. This is because most contracts must adhere to state statutes and rules regarding contracts. This language needs to be in every contract, and it is easier for attorneys to use a standardized format so that the necessary statutes are mentioned.
  • Remedies for breach. Even the most experienced of businesses may not know what their options are if the other party fails to carry out the contract—known as breach of contract. Penalties—known as remedies under the law—are actually prescribed by law, and some types of penalties are prohibited.
  • Jurisdiction for enforcement. If a contract is made between parties in separate states, which is very common in today’s online society, then the contract must explain what state or jurisdiction will be used for disputes, and whether or not arbitration will be used instead of a jury trial. Again, these are items that even experienced business people may not think to include.

CLM software and the modern contract

‌Because the modern contract is commonly electronic, may serve multiple businesses in remote locations, and can require many different approvals and signatures before the final draft, CLM software is essential to the production of a contract.

Digital contracting enables the modern workforce—even though they may be separated by thousands of miles and different time zones—to collaborate seamlessly and coordinate documents without worrying about losing edits or important changes.

‌As noted, the difference between an agreement where two departments have arranged to have something happen by a certain date, and a legally binding contract is in the wording of the document. Any changes in that document are very important, and CLM software ensures that all changes are tracked and dated.

Legal terms for non-legal departments

‌‌Because of the complex language used in drafting documents in conformity with statutes and courts, in today’s business world, the legal department can sometimes be a roadblock to the swift drafting of contracts. This means that everything has to pass through a single department, and that tends to slow down the process.

‌CLM software helps speed up the process by utilizing dropdown menus and text boxes to put the business’s own terms into predesigned templates. By having the templates already prepared, only the terms and conditions for each contract need to be placed, speeding up the process immensely.

Agreement vs. contract for the 21st century

‌‌When it comes time to make a contract for the modern era, very little has changed. The parties must come to an agreement that represents their mutual understanding of the arrangement before they put anything down on paper.

‌Once they have done this, the contract still must conform to the legal requirements for an enforceable document: there must be offer, acceptance, and consideration clearly outlined within the body of the contract before it can be considered valid by the courts.

‌Most importantly, there must be a mutual understanding between the parties so that there is no confusion in the future execution of the contract. In today’s remote online business community, CLM software becomes essential to this portion of the arrangement.

‌‌An agreement can be made over the phone or via email, but an ironclad contract must be identical in everyone’s office before it is signed. CLM software makes sure that this is the case by tracking changes, showing edits, and collecting signatures on final documents when the contract is complete.

A review of Ironclad’s Workflow Designer software demonstrates the effectiveness of CLM in integrating the various agreements into a workable contract. We will help you avoid mutual mistakes and confusion in future endeavors.

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