Key Takeaways:

  • A formal agreement requires a written, signed document and often includes witnesses or notarization.
  • Informal agreements may be valid but are harder to enforce without written proof.
  • Written contracts are essential for clarity, legal protection, and enforceability.
  • Courts analyze the terms of an agreement literally and look for essential legal elements like consideration and intent.
  • Partnership agreements should address ownership, responsibilities, and dispute resolution.
  • Not all agreements are legally binding — enforceability depends on the presence of legal elements and clear terms.
  • Formal agreements are critical in high-stakes or long-term business dealings.
  • Common types of formal agreements include employment contracts, NDAs, sales contracts, and leases.

A formal agreement requires a signed document in addition to verbal consent. If this written contract does not exist, the formal agreement is not legally enforceable. An agreement refers to any understanding between at least two parties regarding specific responsibilities and rights. For informal agreements, an oral contract is sufficient.

Informal vs. Formal Agreements

Contracts are binding legal agreements between two or more parties and are enforceable in court when a party does not fulfill the contractual obligations. Contracts must contain several elements to be legally valid, including:

  • An offer made by one party to another party in exchange for goods or services
  • Acceptance of that offer by the second party
  • Consideration, which is something of value that must be provided by both parties in the form of goods, services, money, or benefits
  • A legal purpose that adheres to applicable regulations
  • Capacity and competence of both parties to enter into the agreement
  • The intention of forming a legally binding agreement on behalf of both parties, without coercion or misrepresentation

Formal contracts must also be notarized or otherwise witnessed, while informal contracts do not. The most common types of business contracts are purchase orders, security agreements, bills of sale, and warranties.

That Make a Formal Agreement Legally Enforceable

A formal agreement becomes legally binding when it includes the following essential elements:

  • Offer and Acceptance: One party must make a clear offer, and the other must accept it under the same terms.
  • Consideration: Both parties must exchange something of value, such as services, goods, or money.
  • Mutual Intent to Contract: The parties must intend for the agreement to have legal consequences.
  • Legal Capacity: Each party must be of legal age and mentally competent to understand the agreement.
  • Legality of Purpose: The contract must not involve illegal activities.
  • Proper Form: Formal agreements are often required to be in writing and may need to be signed, dated, notarized, or witnessed to be enforceable.

These elements help distinguish a formal agreement from casual or social arrangements, which are not typically enforceable in court.

When Is a Written Contract Required?

Most business contracts must be in writing, including non-disclosure agreements, employment contracts, and license agreements. Informal agreements are more flexible and are recommended if the parties involved trust one another. This allows them to make changes without the assistance of an attorney.

Formal contracts are recommended when you need to outline specific obligations and rights for a project, relationship, or partnership.

Examples of Common Formal Agreements

Formal agreements are frequently used in business, real estate, employment, and intellectual property contexts. Examples include:

  • Employment contracts: Define roles, compensation, and termination terms.
  • Non-disclosure agreements (NDAs): Protect confidential business information.
  • Sales agreements: Used for the sale of goods or services, especially high-value items.
  • Lease agreements: Outline terms for renting commercial or residential property.
  • Loan agreements: Specify repayment terms, interest, and default clauses.
  • Service contracts: Used by consultants or contractors to set deliverables and payment terms.

These contracts are legally enforceable and help minimize disputes by setting clear expectations.

How Do Courts Settle Contract Disputes?

If a contract is breached, which means one or more parties fails to fulfill its duties, the other party or parties can have the contract legally enforced by the courts. For this reason, formal contracts are recommended for situations in which you need legal protection. Even when working with friends, family members, or long-time business associates, contracts allow you to:

  • Establish expectations and obligations
  • Delineate payment terms
  • Equally share financial risks
  • Limit personal liability
  • Make sure that all parties are on the same page

The court will examine the contract language to determine whether a breach of contract has occurred. They will use the most basic meaning of the words in question to make this determination. When negotiating a contract, have it reviewed by an attorney to ensure you understand what you are responsible for under its terms and conditions.

If contract language is vague or no consideration exists, the court may find the contract invalid.

What Happens If a Formal Agreement Lacks Clarity?

Even if a formal agreement exists, vague language or missing terms can lead to legal complications. Courts will interpret the document by giving words their plain, ordinary meanings and assessing whether key contract elements are present.

When the terms are ambiguous or incomplete, the court may:

  • Refer to industry standards or previous dealings between the parties.
  • Assess the behavior of each party after signing the contract.
  • Look for implied terms based on fairness and practicality.
  • Invalidate the contract entirely if no meeting of the minds occurred or consideration is missing.

This underscores the importance of clear, precise drafting. Having a legal professional review your formal agreement can help avoid these issues.

The Importance of Partnership Agreements

When starting a business with a partner, a formal partnership agreement is a necessity. As your business gets more successful, having this document in place can prevent disputes from arising and help resolve disagreements that do occur.

Even if you do not create a partnership agreement, if you are in business with someone else you are legally bound by the provisions of the 1890 Partnership Act. Important provisions to understand include the following:

  • Any two people doing business together constitute a partnership.
  • Each partner, in this case, is personally liable for business debts and obligations regardless of fault or investment level.
  • All profits are shared equally, including interest on capital regardless of the contributor.
  • All partners must agree to bring in a new partner.
  • The partnership must be dissolved if one of the partners leaves, dies, or goes bankrupt.

Creating a partnership agreement allows you to create your own provisions for these circumstances.

Provisions to Include in a Partnership Agreement

The partnership agreement should include clauses that detail:

  • The financial or skills investments of each partner
  • The daily management structure
  • Profit-sharing arrangements
  • Provisions for sharing losses
  • Rules about removing money from the business
  • Provisions to follow if a partner wants to leave
  • Provisions for removing a partner who is not performing up to expectations
  • Provisions for resolving disputes among partners

Keep in mind that a formal partnership agreement is flexible and can be tailored to the needs of your specific business, your relationship, your industry, and other factors. Have your business attorney review to make sure it is legally valid before signing.

Formal Agreement vs. Informal Agreement: Key Differences

While both types of agreements can be valid, they differ significantly in how they’re formed and enforced:

Feature Formal Agreement Informal Agreement
Writing Required Yes Not necessarily
Enforceability Generally easier to enforce in court Harder to prove and enforce
Examples Employment contract, NDA, lease agreement Verbal promise, handshake agreement
Legal Formalities Often notarized or witnessed Typically no formal requirements
Risk Lower, due to documentation Higher, due to lack of evidence

Formal agreements are ideal for situations with significant risk, financial stakes, or long-term obligations.

Frequently Asked Questions

1. What is a formal agreement? A formal agreement is a written contract that is legally enforceable and includes specific legal elements such as offer, acceptance, consideration, and intent.

2. Is a verbal agreement legally binding? Verbal agreements can be legally binding in some cases, but they are harder to prove and enforce compared to written contracts.

3. When should I use a formal agreement? Use a formal agreement when engaging in business, financial, or long-term partnerships to ensure clarity, minimize risk, and allow legal enforcement if needed.

4. Do formal agreements need to be notarized? Not all formal agreements require notarization, but having a document notarized adds a layer of authenticity and may be required for specific types of contracts like real estate deals.

5. Can I modify a formal agreement after signing it? Yes, but any changes must be agreed upon by all parties and documented in writing, often as an amendment to the original agreement.

If you need help with creating a formal agreement, 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.