What is the difference between an agreement and a contract? If you own a small business, you need to be precise about the distinction. An “agreement” is simply any arrangement or understanding between two or more parties about their rights and responsibilities to each other. These kinds of arrangements may be “gentlemen’s agreements,” where the agreement relies upon the honesty, honor, and respect of those involved rather than relying upon any enforcement mechanism.

However, a “contract” is a specific type of agreement that creates binding legal obligations between or among parties and makes those obligations enforceable by a court of law. To reach an agreement, two or more parties need only a basic understanding of their relative rights and responsibilities. The requirements for an arrangement are stricter and much more precise. A contract must contain the following core elements:

  • The Offer: The offer is the very first step toward any arrangement . In an employment contract, for example, an employer offers pay and benefits to a prospective employee in return for specified work.
  • The Acceptance: The offer must be accepted before the arrangement actually exists. In an employment situation, for example, without acceptance by both the employer and the prospective employee, the two parties have no arrangement.
  • The Consideration: A consideration may take the form of money, benefits, goods, or services, but both parties must provide something of value in order for a contract to exist. If only one side offers something, it is a gift, not a contract.
  • The Legality: For any arrangement to be legally valid, it must be created for a legal purpose, and it must adhere to the law and to all applicable legal regulations. For example, an employer may hire a prospective employee to perform legal tasks, but an employer may not hire someone to steal a competitor’s trade secrets.
  • Capacity and Competence: A person may only enter inreement that creates binding legal obligations between or among parties and makes those obligations enforceable by a court of la
  • The Intention: All parties to a contract must enter the arrangement honestly, and the contract must express their actual intentions. If any proof of intimidation or blackmail should emerge in a contract dispute, a court will automatically consider the contract invalid.

Each element listed here is imperative if a contract is to be legally binding. As long as a contract meets these requirements, it is enforceable by law, which means that a court may compel compliance with the terms of the arrangement. In some cases, a contract may not need to be in writing, and an oral agreement may in some cases constitute a valid and legally enforceable contract.

WHAT SITUATIONS REQUIRE A CONTRACT IN WRIITING?

Most situations, however, and especially business situations require a contract in writing. Common types of business contracts include non-disclosure agreements, end-user license agreements (both are contracts although they are called “agreements”), and employment contracts. What it’s called doesn’t matter – as long as the elements of an agreement meet the definition of a contract, a court of law may enforce the agreement as a contract.

The main advantage to having an agreement rather than a contract is an agreement’s flexibility and informality. When the parties to an agreement have established confidence and trust in one another, a non-contractual agreement can save time and money and allow more flexibility. Changes to an agreement can be made informally and without necessarily consulting a small business attorney. In contrast, the main benefit of contracts is their specificity regarding the precise rights and obligations of the parties to the arrangement.

Experienced business people understand the value of a written contact. Nedalee Thomas, the CEO of Chanson Water USA, says, “As someone who has started seven businesses and has one that hit $2.2 million in sales by year two, I always prefer a written agreement over an informal one. People forget what they agreed to, and intentions and relationships change. Having said that, as a boot strapper who started business with minimal funding, I always write my own contracts with basic verbiage that can be found on the Internet and then have it reviewed by a legal shield attorney.”

HOW DO COURTS SETTLE CONTRACT DISPUTES?

If one or more parties fail to fulfill their contractual obligations – in other words, if there’s a breach of contract – the contract itself then serves as a guide for the courts to decide upon a just solution for the injured party or parties. Even when the parties to an agreement have established confidence and trust, an arrangement assures that the obligations specified by the arrangement will be fulfilled as intended. Contracts are preferable to less formal agreements in almost any business situation because contracts provide legal protection. Contracts allow the parties involved to:

  • define obligations and expectations
  • specify payment terms
  • share financial risks
  • limit liability
  • ensure mutual understanding

Many small business owners often operate on familiarity, friendship, and trust that’s reflected in informal understandings and agreements with little or no documentation. However, if an agreement is important, it’s worth having an attorney draft a formal arrangement. In central Florida, that task can be handled by an experienced Daytona Beach small business attorney. A skilled small business lawyer can alert you to any terms or conditions in a contract that might raise any concerns.

If there’s a legal dispute, the language of the formal contract is the determining factor. According to management consultant Axel Anaya of Risk-Based Thinkers, “Regarding informal vs. formal agreements … one of the biggest things I have seen is lack of change and scope management when it comes to formally agreeing to something in writing vs. what is verbally told to you by the client. If I do not follow the arrangement as the contractor, I may be liable for any contract deviation. And these liabilities can impact revenue, relationships, and depending on what industry, safety can also be impacted (think a construction contractor deviating from an engineering specification because of a sidebar conversation the contractor had with a client).”

IN A CONTRACT DISPUTE, WHAT DOES THE COURT CONSIDER?

The courts will typically look at the plainest, most reasonable meaning of the language in a contract. When reviewing or considering a contract, read the entire document, and have your small business attorney read it too. What does the arrangement actually oblige you to do? Is there a provision for the dissolution of the contract? If the language of an agreement is vague, or if nothing is actually exchanged, a court may decide that there is no contract.

Your small business should only be a party to contracts drafted specifically for your business and its needs. Avoid pre-printed contracts. Your contracts should be written for you, and that’s one of the reasons the counsel of a good small business lawyer is so imperative. If you misunderstand a contract or you are misled into signing it, that will be tough to prove in court, so a small business owner in central Florida, for example, really must have the legal insights of a Daytona Beach small business attorney regarding any contract before signing it.

A clear, precisely-drafted contract protects your small business by preventing any misinterpretation of the rights and contractual responsibilities of the parties involved. Provided that your business has met its obligations, a properly and precisely-drafted contract will usually keep you out court and protect your business if there’s a breach of contract by the other party or parties.