Agreements vs Contracts
This guide explains the difference between agreements and contracts, the legal elements that make agreements enforceable, and how to structure deals that protect your business under Australian law.
Written by: Mark Lazarus, Commercial Lawyer, Director of Lazarus Legal
Last updated: 12 December 2025
Legal Disclaimer: The information on this page is general in nature and is not intended to constitute legal advice. It does not take into account your personal circumstances. Laws and legal processes can change, and their application varies between cases. You should seek independent legal advice before acting on any information on this page.
Agreements vs Contracts: What's At Stake?
Not every promise you make is legally binding. Here’s the key difference: an agreement is any understanding between parties, while a contract is an agreement that creates legally enforceable obligations.
This distinction matters when a business partner walks away from a handshake deal, when a supplier refuses to honour verbal terms, or when you’re trying to enforce an MOU that turned out to be nothing more than good intentions on paper.
This page breaks down what separates casual agreements from binding contracts under Australian law, what elements turn a promise into an obligation, and how to structure deals that actually protect your business.
Plain-English Definitions
Let’s strip away the legal complexity and define what these terms actually mean.
Agreement
An agreement is a meeting of minds. Two or more parties reach a mutual understanding about something, whether that's splitting equity in a startup, setting payment terms with a client, or deciding who covers shipping costs. It can be verbal, written, or implied through conduct. It simply means you've both said yes to the same thing.
Contract
A contract takes that agreement and adds legal teeth. It's an agreement backed by the specific elements Australian law requires for enforceability: offer, acceptance, consideration, intention to create legal relations, and certainty of terms. Without these elements, your agreement exists, but courts won't enforce it.
Example: You verbally promise your mate you’ll help them move house this weekend. That’s an agreement. You sign a service contract with a removalist company for $800 to move your office furniture on Friday. That’s a contract. The difference is whether the law will step in if someone doesn’t hold up their end.
Core Legal Elements That Turn An Agreement Into A Contract
Australian contract law requires four essential elements to form a contract:
Offer And Acceptance
One party makes a clear proposal. The other party accepts it without changing the terms. Counter-offers restart the process. Written evidence helps prove exactly what was offered and accepted, but verbal contracts work if both parties can prove the terms.
Consideration
Each party must give something of value. Usually it’s money for services, but consideration can be a promise, an action, or forbearance from doing something you’re legally entitled to do. Consideration must be provided at the time of the agreement. Past consideration (something already completed before the promise was made) doesn’t satisfy this requirement.
Intention To Create Legal Relations
Commercial agreements carry a presumption that parties intended legal consequences. Social and family arrangements presume the opposite unless there’s clear evidence of serious intent. Business deals between companies almost always meet this test. Promises between friends usually don’t.
Certainty Of Terms
The agreement must be clear enough to enforce. Vague terms like “reasonable price” or “to be agreed later” create uncertainty. Courts won’t enforce agreements where essential terms are missing or too uncertain to determine what was actually agreed.
Agreements That Are Not Contracts (And Why)
Understanding agreements vs contracts means recognising that some deals never become legally enforceable, even when both parties shake hands and mean what they say.
Social agreements
Social agreements and gentlemen's agreements lack intention to create legal relations. Your promise to bring a dish to a dinner party or your agreement to split petrol costs on a road trip with friends are agreements, but they're not contracts. Courts won't enforce them because there's no evidence either party intended legal consequences.
MOUs
Memoranda of Understanding (MOUs) often sit in grey territory. Many MOUs explicitly state they're not legally binding. They set out parties' intentions and framework for future negotiations without creating enforceable obligations. But an MOU can become a contract if it contains all the required elements. Courts look past the label. If your MOU specifies price, deliverables, payment terms, and both parties signed it expecting to be bound, you might have a contract whether you meant to or not.
Letters of Intent
Letters of intent and "agreements to agree" frequently fail the certainty test. If essential terms are left for future negotiation or if the document is clearly just recording current thinking without commitment, courts usually won't enforce them. The phrase "subject to contract" or "subject to formal agreement" typically signals no binding contract exists yet.
The takeaway: labelling a document as an “agreement” or “MOU” doesn’t make it non-binding. Courts look at substance over title. If the elements of a contract are present and the context shows commercial intention, you might be legally bound regardless of what you called the document.
When An "Agreement" or "MOU" Is Enforceable
Australian courts apply an objective test. They ask whether a reasonable person would understand the parties intended to be legally bound based on their words and conduct. The document’s title matters less than its content and the surrounding circumstances.
An MOU becomes enforceable when it contains the four elements and the parties’ behaviour shows they treated it as binding. Practical indicators include: parties performed obligations under the MOU, invoices referenced the MOU terms, neither party suggested it needed further formalisation, or the document itself contained enforcement mechanisms like dispute resolution clauses.
Best practice: include an express clause stating whether the document is intended to be legally binding. Something like “This MOU is not intended to create legally binding obligations except for clauses 4 and 7 regarding confidentiality and exclusivity” removes ambiguity. If you don’t want to be bound yet, say so clearly. If you do want enforceability, make that explicit and ensure all required elements are present.
Practical Checklist for Businesses
Use this checklist to ensure your business agreements actually protect you when things go wrong.
Use clear, specific terms
State the price, what's being delivered, when delivery happens, payment terms, and how disputes get resolved. Vague language creates uncertainty and uncertainty kills enforceability.
State whether the document is binding
Don't leave it to interpretation. Include a clause that explicitly confirms whether parties intend the agreement to be legally binding or whether it's preliminary only.
Keep written evidence
Emails confirming terms, signed documents, and written variations all help prove what was agreed. Verbal contracts are enforceable but significantly harder to prove if disputed.
Consider formalities for specific contracts
Some agreements require witnesses or particular formalities under Australian law. Property contracts, guarantees, and certain assignments need specific execution requirements. Check what applies to your situation.
Put agreements in writing even when not required
Verbal contracts are valid but create unnecessary risk. Written agreements prevent disputes about what was actually agreed and make enforcement significantly easier if the relationship breaks down.
Know when to get legal advice
When in doubt, consult a lawyer before signing agreements involving significant money, ongoing obligations, IP transfers, restraint clauses, or complex commercial terms.
Summary
- Agreements vs contracts isn’t just semantics. The difference determines whether you can enforce a deal or whether you’re stuck with broken promises and no legal remedy.
- Every contract is an agreement, but not every agreement is a contract.
- Check the four elements, use clear language, and document your intentions explicitly if you want your contract to be legally binding.
About Mark Lazarus – Director, Lazarus Legal
Admitted in both Australia and the UK, Mark brings more than two decades of global legal experience to Lazarus Legal. Having worked as a barrister, in private practice, and as in-house counsel for a major international consumer brand he combines courtroom-honed advocacy with commercial insight. Specialising in commercial law, intellectual property and dispute resolution, Mark advises startups, creative businesses, and established enterprises on transactions, trademarks, contract drafting, and litigation strategy. His cross-jurisdictional background and history as a former in-house legal director give clients confidence that their legal issues will be managed with both strategic foresight and commercial realism.