Insight · Contracts

Agreement vs Contract

Published 25 August 2026

What separates an understanding from something a court will enforce — and where MOUs and handshake deals fall over.

In short

An agreement is any understanding between parties. A contract is an agreement the law will enforce, which in Australia requires offer and acceptance, consideration, capacity, sufficiently certain terms, and an intention to create legal relations. What the document is called does not decide the question.

Clients often ask whether they have "just an agreement" or "an actual contract". The distinction is not about the title on the front page, the length of the document, or whether a lawyer drafted it. It is about whether the five elements below are present.

The five elements of an enforceable contract

Offer and acceptance. A clear proposal, accepted on its terms. A counter-offer is a rejection, not an acceptance — which is why long email negotiations often produce no agreement at all.
Consideration. Something of value moving each way. Money is the usual example, but a promise to do or refrain from doing something counts. Deeds are the exception: they bind without consideration.
Capacity. The parties must be legally able to contract, and the individual signing must have authority to bind the entity. See our note on the law of agency.
Certainty. The essential terms — parties, scope, price or a mechanism for it, and duration — must be identifiable. "Price to be agreed later" is a common way to make a document unenforceable.
Intention to create legal relations. Commercial dealings are presumed to have it; social and family arrangements are presumed not to. Words like "subject to contract" can displace the presumption.

Where the words differ in practice

In Australian commercial usage the terms are largely interchangeable, and nothing turns on the label. But some documents genuinely sit at different points on the spectrum:

Heads of agreement / MOU / term sheet. Records the commercial shape of a deal. Usually intended to be non-binding as to the transaction, but binding as to confidentiality, exclusivity and costs. That split must be spelled out.
Letter of agreement or engagement letter. Short form, but fully binding if the five elements are present. We use these routinely.
Deed. Binding without consideration, subject to execution formalities. Used for accession, novation, release and settlement — see deeds of accession.
Standard terms and conditions. Binding if properly incorporated by reference and brought to the other party's attention before acceptance — and exposed to the unfair contract terms regime if standard-form.

Verbal and handshake deals

Most commercial verbal agreements are enforceable in principle. They fail on evidence. When there is no document, the dispute becomes two competing recollections, and the party with contemporaneous emails, invoices and file notes generally wins. Certain dealings must also be in writing or evidenced in writing, including dealings in land and some guarantees.

If you are already performing a deal that was never documented, do not paper over it retrospectively without advice — a poorly drafted "confirmation" can change the bargain you thought you had.

Can conduct create a contract?

Yes. Acceptance can be by conduct: starting work, paying a deposit, taking delivery. A party who sends terms, receives no signature, and then performs may well be bound on those terms. The risk runs both ways, which is why the safest sequence remains: agree scope, sign, then start.

Practical rules we give clients

If you would be unhappy to lose the money, get it in writing and signed.
Mark pre-contractual documents clearly — which clauses bind, which do not.
Never leave price, scope or term "to be agreed".
Check the signatory's authority, especially for trusts and corporate groups.
Keep one version-controlled document. Competing drafts create competing arguments.

Frequently asked questions

What is the difference between an agreement and a contract?

Every contract is an agreement, but not every agreement is a contract. An agreement becomes a contract when there is offer and acceptance, consideration, capacity, certainty of terms, and an intention to create legal relations. Without those elements a court will not enforce it.

Is a letter of agreement legally binding in Australia?

It can be. Form does not decide enforceability — substance does. A short letter setting out scope, price and the parties' intention to be bound can be a binding contract, while a long document expressly marked 'subject to contract' may not be.

Are verbal agreements enforceable in Australia?

Generally yes for commercial dealings, but they are hard to prove and some categories must be in writing or evidenced in writing — including dealings in land and certain guarantees. Handshake deals fail on evidence, not on principle.

What is a heads of agreement or MOU?

A pre-contractual document recording the commercial shape of a deal. Whether it binds depends on drafting: it should state clearly which clauses are binding (confidentiality, exclusivity, costs) and which are not (the transaction itself).

Does an agreement need to be signed to be binding?

Not always. Conduct — starting work, paying an invoice, accepting delivery — can show acceptance. Signing simply makes the terms and the date far easier to prove, which is why we recommend it in every commercial dealing.

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