What are the two types of agreements
Agreements are basically the glue holding every deal and relationship together in business and law. There's a million different contract forms out there, but honestly? They all boil down to just two main categories based on whether they're actually enforceable or not. If you're getting into any kind of deal—job, service, purchase—you gotta understand these two. It matters more than you think.
So the two big ones are formal agreements (sometimes called contracts under seal) and informal agreements (or simple contracts, if you wanna get technical). What sets them apart? It's all about how they're made and how much formality you need to make them stick legally.
What is a Formal Agreement?
A formal agreement is basically a legally binding contract that has to follow a very specific, prescribed process to be valid. Back in the day, folks called 'em "contracts under seal." Today, the most common example is probably a deed. To make one work, you usually need:
- Writing: Gotta be written down. No shortcuts.
- Signature: The person making the promise has to sign it.
- Witnessing: Often, you'll need one or more independent people to watch you sign.
- Delivery: The document has to be handed over to the other party before it counts.
You see these for big stuff—like transferring land, getting a mortgage, or signing a long-term lease. The law wants extra certainty there, so the strict requirements make 'em harder to fight in court. Less wiggle room.
What is an Informal Agreement?
An informal agreement—or simple contract—is way more common. No fancy format or ceremony needed to make it valid. Instead, it's enforceable if you've got four core elements:
Offer, Acceptance, Consideration, and Intention to create legal relations.
- Offer: One side proposes specific terms.
- Acceptance: The other side says yes, no conditions attached.
- Consideration: Something of value changes hands (like cash for a service). This is what makes it a contract, not just a gift.
- Intention: Both people gotta mean for it to be legally binding.
These can be written, spoken, or even just implied by how people act. Buying something at a store? That's an informal agreement. Agreeing to mow someone's lawn for $50? Same deal. They're perfectly valid, but proving the terms if something goes wrong? That's where it gets messy.
How do Formal and Informal Agreements Differ in Practice?
The real-world differences are huge—especially around enforceability and how long you've got to take action.
| Feature | Formal Agreement | Informal Agreement |
|---|---|---|
| Form | Written + Signed + Witnessed | Written, Verbal, or Implied |
| Consideration | Not always required | Always required |
| Statute of Limitations | Typically longer (e.g., 12 years) | Typically shorter (e.g., 6 years) |
| Common Uses | Property transfers, mortgages, wills | Service contracts, sales, employment |
| Burden of Proof | Lower (document speaks for itself) | Higher (must prove terms and existence) |
Expert Insight: The Critical Role of Intention
Legal scholar Professor Charles Fried says the heart of any agreement is the "promise" itself. But here's the thing—intention works differently between the two types. With a formal agreement like a deed, you're presumed to intend to be bound just by sealing and delivering it. With an informal one, you gotta prove that intention. Context matters. A promise to grab lunch? Probably no legal intention. Hiring a plumber to fix your sink? Automatic. That's why a handshake deal can actually be binding if there's value exchanged and everyone's on the same page. Crazy, right?
People Also Ask
Can an agreement be both formal and informal?
No way. It's one or the other, based on how it's created. You can't have a single agreement that's both. But a transaction might involve multiple documents—like a formal deed for the property and an informal service contract for repairs. The classification depends on the specific document or promise you're looking at.
Is a verbal agreement legally binding?
Yeah, it can be—as long as it's got offer, acceptance, consideration, and intention. But the person trying to enforce it has to prove it. Without anything in writing, proving the exact terms in court? Brutal. Some stuff, like land sales or agreements lasting over a year, have to be in writing under the Statute of Frauds. So don't rely on your memory for big deals.
What is the difference between a contract and an agreement?
People mix these up all the time. Every contract is an agreement, but not every agreement is a contract. An agreement is just a mutual understanding. A contract is an agreement that's legally enforceable because it has all the right elements. Agreeing to dinner? Not a contract. Agreeing to pay $50 for a service? That's a contract. The two types we're talking about—formal and informal—are both categories of enforceable contracts.
What happens if a formal agreement is not properly witnessed?
If a deed isn't witnessed right, it's probably invalid as a formal agreement. Courts won't treat it like one. But here's the twist—it might still work as evidence of an informal agreement if the basic contract elements are there. Lawyers love this argument: salvage a defective formal document by calling it a valid simple contract. Depends on the facts and where you are, though.
Frequently Asked Questions
What are the main types of agreements in business law?
In law, you've got two main ones: formal agreements (deeds, contracts under seal) and informal agreements (simple). Most business stuff—purchase orders, service contracts—falls under informal agreements.
Does a formal agreement always need a witness?
Usually, yeah. For something to count as a formal agreement or deed, the signature usually needs a witness—someone independent who's not part of the deal. That witness signs to confirm they saw it happen.
Can an informal agreement be as strong as a formal one?
Legally, yes. A well-documented informal contract is just as binding as a formal deed. But formal agreements have advantages—longer statute of limitations, lower burden of proof because the document is the evidence. Informal ones? More room for disputes over terms.
What is the "Statute of Frauds" and how does it relate to these types?
The Statute of Frauds says certain contracts have to be in writing to be enforceable. It applies to informal agreements—not formal ones, which are always written anyway. So an informal agreement can be verbal, unless it's about land sales, guarantees, or agreements lasting over a year. Then it's gotta be in writing.
Short Summary
- Two Main Categories: The two types of agreements are formal (deeds) and informal (simple contracts), distinguished by their creation method.
- Formal Agreements: Require a specific written format, signature, and witnessing; they do not always need consideration and have a longer statute of limitations.
- Informal Agreements: Can be written, verbal, or implied; they require offer, acceptance, consideration, and intention to be legally binding.
- Practical Takeaway: While both are enforceable, formal agreements provide more legal certainty, whereas informal agreements are more flexible but harder to prove in court.