There’s no actual debate happening about the difference between agreements and contracts because they’re widely used as interchangeable terms. 

In an attempt to “soften” our language, it seems a lot of business owners have taken to calling contracts “agreements.” 

But that’s an issue. 

Because they are not the same thing. 

In fact, if you consider both as a legal equation, multiple factors separate these two terms. And you need to be aware of all of them in order to protect yourself as a business owner. 

**Real quick before we jump in: 

Everything I share is legal education and information. It’s not business, financial, or legal advice, and it doesn’t create an attorney-client relationship between us.*

Legal equations that define agreements vs contracts 

Almost nothing in the legal world can be summed up without a lot of grey area and “it depends” caveats added to them. 

(If I had a dime for every time I put on my Lawyer Hat and said, “It depends,” I could probably retire from being an attorney!) 

So it’s worth mentioning when something is more cut-and-dried. 

These 2 equations that differentiate agreements from contracts are a rare, straightforward legal moment: 

Offer + Acceptance = Agreement 

Offer + Acceptance + Consideration + Capacity + Legality = Contract 

Defining an agreement

An agreement is a mutual assent between two (or more) parties to one another.  

In its simplest form, an agreement could be what time you’ll start a neighborhood block party for the 4th of July. 

An agreement is only made up of two parts: Offer + Acceptance

  • An offer is a statement of terms that must be clearly stated so that the other party can understand what’s being offered and what they’re expected to do in exchange.
  • Acceptance means to agree to the terms of an offer.

Pretty simple, right? 

Agreements can be made from words, conduct, or even silence. 

The meaning of an agreement can be pretty broadly applied to almost anything that involves communication between two or more parties. 

You can start to see why this isn’t as useful in a business owner’s context.

Defining a contract

A contract is an agreement between two (or more) parties that creates mutual obligations enforceable by law. 

So, while an agreement may not be a contract, a contract is always an agreement. 

A contract is made up of multiple elements: Offer + Acceptance + Consideration + Capacity + Legality 

As above, an offer is a statement of terms that must be clearly stated so that the other party must understand what’s being offered and what they’re expected to do in exchange.  

And acceptance means to agree to the terms of an offer. 

Here’s what the other elements mean: 

  • Consideration is a promise, performance, or forbearance bargained by a promiser in exchange for their promise.  

This is the main element that makes a contract legally enforceable.  

For example, if someone pays you for website design, the money is your client’s consideration. 

  • Capacity in contract law refers to a person’s ability to make a rational decision. 

Typically, it means a person has reached a minimum age and is of sound mind. 

  • Legality means it’s in accordance with the law. 

It doesn’t matter whether you have documentation or not, a contract outlining something illegal (like a drug deal, for example) would not be enforceable. 

The laws in your state will determine the details of each element of the contract “formula.”

Documenting your contracts

Agreements obviously don’t have to be formally documented in writing. 

But it may surprise you to learn that neither do contracts. Both oral and written contracts can be legally enforceable. 

That said – proving an oral contract can be a royal pain in the proverbial. 

Oral contracts come down to a lot of he said/she said, and different states have different rules about what types of contracts have to be in writing to be enforceable. 

You’re always better off having written documentation of your contracts. 

Especially when it comes to running a business and keeping clients happy. 

To snag an attorney-drafted template that makes documenting your contracts a no-brainer, head to The Legal Shop. 

(Or contact Nicole Cheri Oden Law if you’re based in California.) 

Don’t even know where to start sorting through agreements vs contracts and all the legal ins and outs of business ownership? Get your free online entrepreneur’s guide.

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