Agreement

An agreement is a mutual understanding between two or more parties that outlines the rights, obligations and terms of their relationship. It means that everyone is on the same page about a particular matter. Unlike contracts, agreements may or may not be legally binding. Agreements can be written, oral or implied, though written agreements are generally easier to enforce in legal settings.

Are Agreements and Contracts the Same Thing?

No quite, While all contracts are agreements, not all agreements are contracts. The key difference? Enforceability.

A contract is a legally binding agreement that can be enforced in court if one party doesn't hold up their end of the bargain. An agreement might be two sales managers deciding to coordinate their approaches in overlapping territories, helpful for efficiency, but not something you'd take to court if someone changes their mind. These informal agreements create expectations and build trust but you can't sue a colleague for changing their mind about coordinating territories.

In business, this distinction matters. When you need legal recourse if something goes wrong, you need a contract. When you're simply documenting a shared understanding or collaborative intent, an agreement might be sufficient.

What are the Different Types of Agreements?

Informal Agreements are often verbal or based on a handshake, these outline a simple understanding. While not always enforceable in court, they can still help build trust and cooperation.

Formal Agreements are written documents that specify specific terms and conditions of the understanding. Common types used in business include:

• Non-Disclosure Agreements (NDAs) to protect confidential information. For example, an NDA signed before discussing a potential acquisition prevent either party from sharing sensitive financial details or trade secrets.
• Service Level Agreements (SLAs) to define the expected level of service from a provider. A cloud hosting SLA might guarantee 99.9% uptime, specify response times for support tickets, and outline credits you'll receive if they miss those targets.
• Letter of Intent (LOIs) to express initial commitments in a negotiation. Legal enforceability depends on how they're written. Before finalizing a commercial real estate lease, an LOI might outline the proposed rent, lease terms, and major conditions, signaling serious interest while allowing both sides to negotiate deals.
• Memorandums of Understanding (MOUs) outlines the basis of collaboration between organizations. Two nonprofits might sign an MOU to co-host an annual conference, describing each organization's responsibilities without creating binding obligations.

What are the Essential Elements of a Legally Binding Agreement?

For an agreement to be legally binding, it typically must include the following elements:

• Offer: A clear proposal by one party to another, outlining specific terms and conditions. "I'll design your website for $5,000, delivered in six week's" is an offer. "I can probably help you with your website sometime" is not.
• Acceptance: An unequivocal agreement to the offer's terms, Acceptance must match the offer exactly. If you counter with "I'll pay $4,000 for the website design," that's a new offer, not acceptance of the original one.
• Awareness: A mutual understanding or meeting of the minds of the terms and conditions. All parties must genuinely understand what they're agreeing to. This legal concept means everyone shares the same interpretation of the terms. If key terms are so vague that parties interpret them differently, a court may find no true agreement existed.
• Consideration: Something of value exchanged, such as money, goods, services or promises to act (or refrain from acting) in a certain way. Both parties need "skin in the game."
• Capacity: All parties involved must have the legal ability to enter into the agreement. This means they're of legal age (typically 18), mentally competent, and not impaired by substances when signing. It also means the person signing has the authority to bind their organization. An interns can't typically sign a six-figure contract on behalf of the company.
• Legality: The agreement's purpose must be lawful. It cannot involve illegal activities. You can't create an enforceable agreement to split profits from an illegal gambling operations or to pay someone to violate a competitor's patents.