Legal Difference Between Contract and Agreement Explained

Key Takeaways

• A contract is always legally enforceable; an agreement may not be unless it meets specific legal requirements.
• All contracts are agreements, but not all agreements qualify as contracts.
• Service agreements are a type of contract focused specifically on the provision of services.
• The key differences include formality, enforceability, legal obligations, and remedy options in disputes.
• Contracts require offer, acceptance, consideration, competency, and legal purpose to be valid.
• Written contracts are not always required, but they provide stronger legal protection.
• Parties should be mindful of intent to create legal obligations, as this separates simple agreements from contracts.
• For legal clarity and enforceability, it is advisable to consult a qualified attorney—such as those available on UpCounsel.

What is the difference between service agreement and contract? All contracts are considered agreements, but not all agreements are contracts. There are small differences between a contract and a service agreement. Essentially, a contract follows a more formal outline than an agreement. An agreement can include any understanding between multiple parties about what they promise to do for each other. Often referred to as “gentlemen's agreements”, these informal deals depend on all parties honoring the agreement instead of being enforced by a third-party or the threat of legal consequences.

On the other hand, a contract is legally binding, and courts can enforce the terms if they aren't met. An agreement is much less rigid and formal. If there is a dispute between parties of a contract, either party can take it to court. However, most contracts don't end up in court. In fact, most contracts can be made verbally unless there is a definitive reason the contract needs to be written. A written contract protects everyone involved if something goes wrong.

In the case that one party believes the other party has breached the contract or not kept up their side of the deal, they can file a lawsuit and take that party to court. During litigation, the court will decide if there was a breach of contract or if other circumstances nullify the breach. The important thing to remember is that only valid contracts can be taken to court for a dispute.

What is Required in a Contract or Service Agreement?

To create an agreement, all parties need to understand and agree upon their rights and responsibilities. An agreement typically lacks one or several elements that make a contract legally binding.

A contract has certain requirements that must be met precisely in order to for it be valid. The following elements are essential to creating a legally binding contract:

• Offer and Acceptance: The contract must include an offer made by one party and the acceptance of that exact offer by the other party. All parties must agree to any modifications made in the contract, and no one can be forced into agreeing to the terms. The conditions imply that all parties intend for the agreement to be binding. A contract can't be created if one party isn't serious.
• Mutual Consent: The offer and acceptance must be agreed to by both parties without force or coercion. Everyone must agree to the exact terms.
• Consideration: In order to be valid, something of value must move between the two parties. Consideration often takes the form of money, but it can also be goods or services. Both parties have to exchange something, such as money exchanged for a service. If just one party provides consideration, the agreement is a gift rather than a contract.
• Competence: Neither party can be a minor or anyone who is incompetent to understand what they are agreeing to. All parties must understand what is stated in the contract. If either party is deemed incompetent, the contract is considered void.
• Legal Purpose: A binding contract can't involve any illegal activities and must be able to be plausibly obtainable by both parties. If the agreement is based on something that seems impossible, either party can modify the terms as they see fit.

A contract that meets these requirements is considered enforceable by law, which means one party can take the other party to court if they don't comply with the terms of the contract.The difference between an agreement and a contract can be seen in the following examples. If two friends agree to meet for dinner and one friend doesn't show up, the other friend can't do anything to get the damages for their wasted time because it was an agreement to do something, not a contract.

In another example, a parent agrees to pay their child's debt. The agreement is written and agreed to by the child and the parent, which makes it an enforceable contract.

Not all contracts need to be written. In many instances, an oral agreement creates a valid contract as long as it meets the criteria listed above.

How to Strengthen an Agreement Into a Contract

To ensure that an agreement is enforceable, consider the following steps:

1. Put it in writing – While verbal agreements can be valid, written documents are more reliable in legal disputes.
2. Clearly define terms – Spell out all expectations, duties, payment terms, timelines, and dispute resolution methods.
3. Include legal language – Use precise, formal language to reflect legal intent.
4. Verify mutual understanding – All parties should review and acknowledge the same understanding of the terms.
5. Have parties sign – Signature by all parties shows consent and can be used in legal proceedings if needed.

Even for small business deals or freelance work, taking these steps can provide legal protection and reduce misunderstandings.

Risks of Relying on Non-Binding Agreements

Relying on a non-binding agreement can expose parties to significant risks, including:

• Lack of legal protection in case of disputes
• Miscommunication around duties and expectations
• Difficulty proving breach or damages in court
• No recourse for enforcement, especially when one party fails to perform

To avoid these issues, parties should formalize important agreements into contracts and clearly document all terms.

Common Use Cases for Agreements vs. Contracts

Understanding the appropriate use of agreements and contracts can help individuals and businesses avoid legal risks. Below are typical scenarios for each:

Use Cases for Agreements:

• Informal arrangements between friends or family
• Memoranda of understanding (MOUs)
• Preliminary business discussions

Use Cases for Contracts:

• Employment agreements
• Vendor or client services
• Sales of goods or services
• Construction or lease agreements

Businesses should always default to contracts when enforceability, financial risk, or legal clarity are key concerns.

Importance of Intent and Legal Consideration

Two essential factors that separate a legally binding contract from a non-binding agreement are intent to create legal relations and consideration.

• Intent: The parties must clearly intend that their arrangement has legal consequences. Social agreements (e.g., lunch plans) lack this intent and are typically unenforceable.
• Consideration: Each party must exchange something of value. If one party offers a benefit without receiving anything in return, it may be considered a gift rather than a contract.

Courts use these criteria to determine if a legally enforceable relationship exists. If the intent is missing, even a signed document might not be binding.

What Is a Service Agreement?

A service agreement is a specific type of contract used when one party agrees to provide a service to another. These agreements detail the scope of work, payment terms, deadlines, and responsibilities of each party.

Service agreements are commonly used in business settings, including:

• Freelance or consulting services
• IT support or software development
• Maintenance and repair services
• Professional services (e.g., legal, accounting)

Though labeled an “agreement,” service agreements are usually structured to meet the legal standards of a contract, making them legally binding and enforceable. They help minimize misunderstandings and protect all parties in case of disputes.

Key Differences Between a Contract and an Agreement

While "agreement" and "contract" are often used interchangeably, there are legal distinctions between them that significantly affect enforceability:

A key factor that determines whether an agreement becomes a contract is the intent to create legal obligations. For example, a dinner plan between friends is an agreement, but it lacks enforceability. In contrast, a signed business service agreement outlining payment terms and deliverables is a contract.

Frequently Asked Questions

1. What is the main difference between a contract and an agreement? A contract is a legally binding agreement enforceable by law, while an agreement may or may not be enforceable depending on its structure and intent.

2. Are all contracts written? No, contracts can be verbal as long as they meet the legal requirements. However, written contracts are easier to prove and enforce in court.

3. Can a service agreement be verbal? Yes, but a written service agreement is recommended to clarify responsibilities and protect all parties legally.

4. What makes an agreement legally binding? It must include offer, acceptance, consideration, mutual intent to create legal obligations, and be made by competent parties for a legal purpose.

5. Where can I get legal help drafting a contract or service agreement? You can find experienced business attorneys on UpCounsel who can help draft, review, or enforce contracts tailored to your needs.

If you need help with the difference between a service agreement and contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.