Letter of Agreement and Contract: What is an Agreement & What is a Contract?

Letter of Agreement: A letter of agreement is a document that outlines the terms and conditions between two parties to create an ideal working relationship and protect their legal rights and responsibilities. Usually, it is written after both the parties come on the same page.

Contract: A contract is a formal document that outlines the terms and conditions agreed upon by both the parties and bind them legally. A contract is also signed when a person or party accepts the offer of another person or party. It means that the existence of an offer and acceptance are necessary for a contract.

Agreement V/S Contract

There are many differences between agreement and contract. We can describe these differences in the following way:

1. Definitions of Contract and Agreement

Agreement and contract are two different documents. An agreement is a less formal document highlighting the terms and conditions agreed upon between two persons or parties. Whereas, a contract is a formal document that legally binds the persons and parties on the agreed terms and conditions. This means that all contracts are agreements but all agreements are not contracts.

2. The obligation in a Contract and Agreement

There is a great difference between agreement and contract in terms of obligation. An agreement is a mostly social and domestic obligation while a contract is a legal obligation. The agreement has nothing to do with the law while the contract binds the persons or parties to act upon the agreed conditions.

3. Nature and Scope of a Contract and Agreement

An agreement is always complex in nature and wider in scope as compared to a contract which is not much complexity in nature and is always limited in scope.

4. The relation between Contract and Agreement

Due to missing legal obligations, all agreements are not included in contracts whereas, all the contracts are agreements because a contract cannot be signed or made unless both the parties agree to the specified terms and conditions.

5. Writing and Registration of a Contract and Agreement

Since agreements are less formal, there is no need of writing and registering the agreements. Even, the written agreements do not need to be registered. On the other hand, contracts are always registered because registering these increases the legal value.

What makes an Agreement to become a Contract?

An agreement can turn into a contract if it fulfills the basic requirements of a contract.

Following are the four basic requirements of a contract and any agreement containing these may be called a contract.

• Presence of a valid offer by a party.
• Acceptance of the offer by the other party.
• The intention of both the parties to enter into a legal relationship.
• The consideration which means the payment from one party to the other for completion of the contract.

What makes an Agreement Legally Binding?

Earlier, there was a misconception that an agreement is changed into a contract by a lawyer through his approval or signature. But nowadays, people fully understand the essentials of a contract. 

Following are the three requirements, if fulfilled, make an agreement legally binding.

• An agreement between the two parties to create a working relationship.
• Economic Value of the agreement for any of the partners.
• The willingness among partners to Enter into Legal Relations

What makes a contract legally binding?

A contract is legally binding when it has all the essential elements that make it legally enforceable. Almost, all kinds of contracts are legally binding whether oral or written.

The contract containing the following four elements are legally binding.

• Parties able to enter the contract.
• Consent or willingness of both the parties.
• An object or thing on which the parties wish to enter a contract.
• Mutual benefit or consideration.