agreement and contract
mahendrakumar
(Querist) 15 March 2010
This query is : Resolved
what is the difference between and agreement and a contract?
Raj Kumar Makkad
(Expert) 15 March 2010
Good question...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, will answer "well that depends." On what does it depend?
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.
* When you intend to be bound immediately but you also want to record the detail of the agreement later. The terms in the formal agreement will be essentially the same but perhaps explained in more detail but do not change. Where this happens, you are likely to be bound by the terms of the first agreement even though a formal document is not signed.
* When you intend to be bound but not until a formal contract is signed. In other words, you have reached agreement and the formal agreement won't vary any terms, but until the formal agreement is in fact signed, neither party will be 'bound'.
* When you do not intend to be bound unless and until each party executes a formal agreement. This usually (with some significant legal exceptions) means that either party may withdraw at any time if they have not signed the formal agreement.
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.
Hope you're satisfied with this answer.
Sivadas Chettur
(Expert) 15 March 2010
An agreement is a very wide term so as to include any sort of agreement be it legal, illegal, immoral,anti-statutes,formal or informal social agreements etc. Whereas contract is defined under the contract act 1872 to be an agreement enforceable in law. Therefore contract is a narrower term than agreement. All contracts are agreements but all agreements are not contracts-is based on the above principles. You may refer to the classic decision in Balfour v Balfour in this regard.
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Kumar Thadhani
(Expert) 15 March 2010
Nothing more to add than to the opinion of experts.
mahendrakumar
(Querist) 15 March 2010
thanks to Mr.Rajkumar and Mr Sivadas.
J K Agrawal
(Expert) 15 March 2010
We got really a very good answer to a very good question. We are thankful to Makkad Sahib.
S 2 h defines contract as under
'An agreement enforceable by the law is a contract'
I think this simple sentence states every thing.
