What is the difference between contract and agreement? What can an agreement be a contract? Discuss elaborately?



Answer:

  1. 1.      Introduction: Contract and agreement are related to each other. Below information has been described about contract and agreement.

1.1. Contract:

An agreement between two or more competent parties in which an offer is made and accepted, and each party benefits. The agreement can be formal, informal, written, oral or just plain understood. Some contracts are required to be in writing in order to be enforced. An agreement between two or more parties which creates obligations to do or not do the specific things and that are the subject of that agreement. Examples of a contract are a lease, a promissory note, or a rental agreement.

This term, in its more extensive sense, includes every description of agreement, or obligation, whereby one party becomes bound to another to pay a sum of money, or to do or omit to do a certain act; or, a contract is an act which contains a perfect obligation. In its more confined sense, it is an agreement between two or more persons, concerning something to be, done, whereby both parties are hound to each other, or one is bound to the other. Blackstone defines it to be an agreement, upon a sufficient consideration, to do or not to do a particular thing. A contract has also been defined to be a compact between two or more persons.

Contracts are divided into express or implied. An express contract is one where the terms of the agreement are openly uttered and avowed at the time of making, as to pay a stated price for certain goods.

Implied contracts are such as reason and justice dictates, and which, therefore, the law presumes every man undertakes to perform; as if a man employs another to do any business for him or perform any work, the law implies that the former contracted or undertook to pay the latter as much as his labor is worth; or if one takes up goods from a tradesman without any agreement of price, the law concludes that he contracts to pay their value.[1]

1.2. Agreement:

A meeting of the minds. An agreement is made when two people reach an understanding about a particular issue, including their obligations, duties and rights. While agreement is sometimes used to mean contract — a legally binding oral or written agreement — it is actually a broader term, including understandings that might not rise to the level of a legally binding contract. The writing or document that records the meeting of the minds of the parties. An oral compact between two parties who join together for a common purpose intending to change their rights and duties.

An agreement is not always synonymous with a contract because it might lack an essential element of a contract, such as consideration.

1)      In any meeting of the minds, even without legal obligation.

2)      In law, another name for a contract including all the elements of a legal contract: offer, acceptance, and consideration (payment or performance), based on specific terms[2]

  1. 2.     Difference between contract and agreement:

The basic difference between contract and agreement is that the remedies for breach of contract and breach of agreement are way too different. Contract becomes enforceable once three conditions of legally binding agreement are met while agreement can be worked upon when two minds meet at a certain point.

A gentlemen agreement is not enforceable by law whereas a contract can be enforceable by law.

Discussion about agreements and contracts can sometimes read like the “chicken and the egg” question. It is true that you cannot have a contract without an agreement. But it does not necessarily follow that an agreement will necessarily be the same as a contract. Why is that?

A contract requires agreement on the terms; consideration (usually but not always money) and an intention by both parties to be legally bound to each perform their respective promises. But an agreement may not be intended to be legally binding on the parties. This is often the case when parties want to formally record their ‘agreement’ even though they may not have concluded all the details of the entire transaction. Commonly such agreements may be called “Heads of Agreement” or “Memorandum of Understanding” or “letter of intent”. These latter forms are often put together to indicate good faith and ongoing commitment to each other to pursue the negotiations with a view to entering into an enforceable contract at some later stage. But an agreement ‘to agree’ (at some future point) is not enforceable and the courts have always been reluctant to step into parties’ shoes to try and work out what should have been included, but for some reason, was not.

I am often asked whether or not an MOU is binding. It is usually the case that it is not and indeed in many cases parties enter an MOU or a Heads of Agreement because they have not concluded all the matters to be agreed that would enable them to be considered to be bound. But of course the legal system it is not a science and it is often the case that a lawyer, when faced with such questions. It will answer “well that depends.” On what does it depend?

2.1.          Some of the critical issues include:

 By applying an objective test, does it appear that the parties intended to be bound? How did they act? What did they say? Of what they said, how much of it (and what) was recorded formally?

 What were the commercial circumstances at the time – of the parties, the subject matter of the contract, (what was being contracted for)?

 What were the dynamics of the negotiation process? If a term is later asserted by one party to be essential to the contract but it is not in the document, what does that indicate about what is said that they appear to have agreed as important?

If you do want to put together a ‘preliminary agreement’, remember these rules as a guideline but always seek the advice of a lawyer to be sure.

The greatest danger is in not understanding the effect of using certain words in legal or quasi-legal documents. While in ordinary English use they may have a common understanding and effect, it is not always the case that they have the same ‘ordinary’ meaning when they are used in legal documents. What is of most significance is to make a clear and unambiguous statement about whether or not the agreement (or memorandum or letter) is intended to bind the parties. At a practical level this can have other important flow-on effects, like for example, whether costs and commitments and other activities might or should be incurred until the formal agreement is signed, and whether someone else might incur costs thinking that you intend to proceed.

 Often people will avoid such issues as they don’t want to stifle the commercial process or offend the other party. Commercial pragmatism should always be balanced against legal risk and they are not mutually exclusive. It costs less to be sure than to fight it out later.[3]

2.2.          Characteristic of a contract:

[4]The French Civil Code of 2009 defines a contract at §1101 as:

“A contract is an agreement by which one or several persons bind themselves, towards one or several others, to transfer, to do or not to do something.”

Similarly, §1378 of the Quebec Civil Code, albeit in its typical stilted English[5]:

“A contract is an agreement of wills by which one or several persons obligate themselves to one or several persons to perform a presentation.”

2.3                        Characteristics of an agreement:

An agreement must have relation between at least two persons which is enforceable at law.

At common law, a contract requires three elements[6]:

  1. A meeting of the minds (also known as consensus ad idem or an offer coupled with an acceptance) on fundamental or substantial terms;
  2. In common law jurisdictions, that elusive concept of consideration (something must flow from each party); and
  3. Compliance with common law or statute law such as the subject matter of the contract must not be illegal and the parties must be “competent to contract” (corporations or adults but not the mentally disabled).

2.4  An Agreement can be a contract: Here I am going to discuss some ways where agreement can be a contract. And that is:

  1. The reciprocal or mutual assent of two or more persons competent to contract. Every agreement ought to be so certain and complete, that each party may have an action upon it; and the agreement would be incomplete if either party withheld his assent to any of its terms. The agreement must, in general, be obligatory on both parties, or it binds neither. To this rule there are, however, some exceptions, as in the case of an infant’s contract. He may always sue, though he cannot be sued on his contract.
  2.  There must be a good and valid consideration, motive or inducement to make the promise upon which a party is charged, for this is of the very essence of a contract under seal and must exist, although the contract is reduced to writing.
  3. There must be a thing to be done, which is not forbidden; or a thing to be omitted, the performance of which is not enjoined by law. A fraudulent or immoral contract or one contrary to public policy is void.

2.5                       Process of contract and agreement:

Although it may seem like stating the obvious, an essential element of a valid contract is that all parties must agree on all major issues. In real life, there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. To help clarify these borderline cases, the law has developed some rules defining when an agreement legally exists[7].

  1. a.       Offer and Acceptance

The most basic rule of contract law is that a legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing.

Let’s say, for instance, you’re shopping around for a print shop to produce brochures for your business. One printer says (or faxes, or emails) that he’ll print 5,000 of your two-color flyers for $300. This constitutes his offer.

If you tell the printer to go ahead with the job, you’ve accepted his offer. In the eyes of the law, when you tell the printer to go ahead you create a contract, which means you’re liable for your side of the bargain (in this case, the payment of $300). But if you tell the printer you’re not sure and want to continue shopping around (or don’t even respond, for that matter), you haven’t accepted the offer, and no agreement has been reached.

But if you tell the printer the offer sounds great except that you want the printer to use three colors instead of two, no contract has been made. This is because you have not accepted all of the important terms of the offer. You have actually changed one term of the offer. (Depending on your wording, you have probably made a counteroffer, which is discussed below.)

  1. b.       When Acceptance Occurs

In day-to-day business, the seemingly simple steps of offer and acceptance can become quite convoluted. For instance, sometimes an offer isn’t quickly and unequivocally accepted; the other party may want to think about it for a while, or try to get a better deal. And before the other party accepts your offer, you might change your mind and want to withdraw or amend it. Delaying acceptance of an offer and revoking an offer, as well as making a counteroffer, are common situations that may lead to confusion and conflict. To minimize the potential for a dispute, here are some general rules you should understand and follow.

  1. c.        How Long an Offer Stays Open

Unless an offer includes a stated expiration date, it remains open for a “reasonable” time. What’s reasonable, of course, is open to interpretation and will vary depending on the type of business and the particular fact situation.

To leave no room for doubt as to when the other party must make a decision, the best way to make an offer is to include an expiration date.

If you want to accept someone else’s offer, the best approach is to do it as soon as possible, while there’s no doubt that the offer is still open. Keep in mind that until you accept, the person or company who made the offer — called the offeror — may revoke the offer.

       Revoking an Offer

Whoever makes an offer can revoke it as long as it hasn’t yet been accepted. This means that if you make an offer and the other party wants some time to think it through, or makes a counteroffer with changed terms, you can revoke your original offer. Once the other party accepts, however, you’ll have a binding agreement. Revocation must happen before acceptance.

An exception to this rule occurs if the parties agree that the offer will remain open for a stated period of time.

  1.  Offers with Expiration Dates

An offer with an expiration date is called an option, and it usually doesn’t come for free. Say someone offers to sell you a forklift for $10,000, and you want to think the offer over without worrying that the seller will withdraw the offer or sell to someone else. You and the seller could agree that the offer will stay open for a certain period of time — say, 30 days. Often, however, the seller will ask you to pay for this 30-day option — which is understandable, because during the 30-day option period, the seller can’t sell to anyone else.

Payment or no payment, when an option agreement exists, the offeror cannot revoke the offer until the time period ends.

  1. f.         Counteroffers

Often, when an offer is made, the response will be to start bargaining. Of course, haggling over price is the most common type of negotiating that occurs in business situations. When one party responds to an offer by proposing something different, this proposal is called a “counteroffer.” When a counteroffer is made, the legal responsibility to accept, decline or make another counteroffer shifts to the original offeror.

For instance, suppose your printer (here, the original offeror) offers to print 5,000 brochures for $300, and you respond by saying you’ll pay $250 for the job. You have not accepted his offer (no contract has been formed) but instead have made a counteroffer. If your printer then agrees to do the job exactly as you have specified, for $250, he’s accepted your counteroffer, and a legal agreement has been reached.

Even though a contract is formed only if the accepting party agrees to all substantial terms of an offer, this doesn’t mean you can rely on inconsequential differences to void a contract later. For example, if you offer to buy 100 chicken sandwiches on one-inch-thick sourdough bread, there is no contract if the other party replies that she will provide 100 emu filets on rye bread. But if the other party agrees to provide the chicken sandwiches on one-inch-thick sourdough bread, a valid contract exists, and you can’t later refuse to pay if the bread turns out to be a hair thicker or thinner than one inch.

  1. g.       Exchange of Things of Value

In addition to both parties’ agreement to the terms, a contract isn’t valid unless both parties exchange something of value in anticipation of the completion of the contract.

  1. h.       Consideration Defined

The “thing of value” being exchanged — which every law student who ever lived has been taught to call “consideration” — is most often a promise to do something in the future, such as a promise to perform a certain job, or a promise to pay a fee for a job. For instance, let’s return to the example of the print job. Once you and the printer agree on terms, there is an exchange of things of value (consideration): The printer has promised to print the 5,000 brochures, and you have promised to pay $250 for them.

  1. i.         Promises vs. Action

Although the exchange-of-value requirement is met in most business transactions by an exchange of promises (“I’ll promise to pay money if you promise to paint my building next month”), actually doing the work can also satisfy the rule.

If, for instance, you leave your printer a voicemail message that you’ll pay an extra $100 if your brochures are cut and stapled when you pick them up, the printer can create a binding contract by actually doing the cutting and stapling. And once he does so, you can’t weasel out of the deal by claiming you changed your mind.

These are the process where agreement becomes a contract between two people. And this is a process from the many of process. And it might used is various ways.

3        Conclusion:

Contracts come into existence through agreement. Agreement, if not legally binding cannot be enforced by law. Contracts and agreements can be of various types. There are certain presumptions of intention to create legal relation in contract. It is presumed in domestic contract there is no intention to create legal relation and in business contract it is highly intended to create legal relation. Agreements on the other hand do not have such presumptions; they can be between domestic as well as business parties until they intend to be legally bound on that.

Bibliography:

  1. West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group
  2. Roderic G Broadhurst, P. N. (2009). Contract and agreement
  3. Kenneth A. Adams, (2002). A Manual of Style for Contract Drafting.
  4. Clark, L.S., Kinder, P.D, Hotchkiss, C., Law and Business (1991) McGraw-Hill, New York: United States
  5. Tara K. Harper, (2004). Reading and Signing Contracts.
  6. Mark L. Levine, (1988, 1994). Moyer Bell: Negotiating a Book Contract, a Guide for Authors, Agents, and Lawyers.
  7. 6. Klein, William A. The Modern Business Organization: Bargaining Under constraints, 91 Yale L.J. (1982).
  8. Berle, Adolfe, and Gardiner Means (1967). The Modern Corporation and Private Property. Rev. ed. New York: Harcourt, Brace and World.
  9. Davis, John (1971). Corporations: A Study of the Origin and Development of Great Business Corporations. New York: Lennox Hill.
  10.  Kostant, Peter C., (1996) Business Organizations. New York, New York: Little, Brown and Company.


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[1] Retrieved From the ‘Lectric Law Library’s Lexicon’ Section-b

[2] West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc

[3] Information Retrieved from: http://www.normans.com.au/news/business_issue48_sept2004.html

[4] Duhaime, Lloyd, Legal Definition of Contract Law

[5] Tisserand-Martin, A., Code Civil 2008, 107 Ed. (Paris: Dalloz, 2008)

[6] Civil Code of Quebec, Statutes of Quebec 1992, Chapter 64

[7] Information retrieved from: http://www.nolo.com/legal-encyclopedia/contracts-101-make-legally-valid-30247.html