Monday, December 12, 2011

Contracts versus Agreements

I continue to be amazed at some of the posts that I see on LinkedIN. One topic asked what was the difference between a contract and an agreement. Some of the responses said that agreements weren’t enforceable, but contracts were. That’s simply wrong. The simple fact is what you call a document has no impact on whether it will be enforceable or not, its whether the document meets all the requirements for it to be a legally binding in accordance with contract law.

Contract law requires six things for an enforceable agreement between the parties 1) an offer, 2) an acceptance, 3) legal purpose and objective 4) a meeting of the minds of the parties, 5) consideration and 6) competent parties. (See post Contract – legal requirements for a contract). The laws of different jurisdictions may further require other things to make it enforceable. For example, countries that have a "statute of frauds" law require a writing for certain transactions to be enforceable. Other locations may require documents to be sealed, or notorized or include a tax stamp to enforce them.

The simple fact is you can call the document that represents a transaction between two parties almost anything. It can be a contract, an agreement, a lease, a license, a non-disclosure agreement, or virtually anything else. Purchase Orders aren’t called contracts but under the law of contracts they become an enforceable contract when they meet the six requirements to form a contract. Even documents called Memorandums of Understanding and Letters of Intent can be legally enforceable contracts. All that has to occur is for the content to meet the requirements to form a contract and be signed by both of the parties. Calling a document something different than a contract does not protect you from the other party enforcing it if the document itself meets the requirements to form a contract.

In many contracts the term agreement is made a defined term. This is done so that every time that defined term is used it has the meaning that is set forth in the defined term. For example, you could have a purchase contract, a statement of work, specifications, other documents and could be issuing purchase orders ordering the product or service. When defined to include all of those documents as making up the complete agreement by the parties, when you use the defined term it would include all the requirements of those documents and it would be interpreted in accordance with the order of precedence you establish.

The internet is a great tool and social media sites can also help you learn. Just remember not all the items posted may be correct or accurate. With my blog, if someone feels a post is inaccurate please leave a comment, I want readers to get accurate knowledge.

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