Differences Between Implicit & Explicit Agreements

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Two businessmen shaking hands on agreement in airport.
Two businessmen shaking hands on agreement in airport. (Image: John Rowley/Digital Vision/Getty Images)

Companies form agreements with business partners, municipalities, customers, employees and shareholders. Some of these agreements are written in an explicit contract and signed off on by all participants. Others are implicit agreements formed by legal or ethical obligations for each party to carry out certain responsibilities.

Explicit Examples

A common explicit agreement is when a company signs a joint venture contract or partnership with another firm. The agreement spells out the roles and financial interests of each business. Property sales and acquisitions also normally involve formal contracts. Companies sign explicit agreements with lenders to get financing. They also ask customers to sign purchase orders for documentation of an agreement to buy goods or services. The best way to protect your business from lawsuits and unethical practices is to create formal contracts for all major business transactions.

Implicit Examples

Local, state and federal governments direct many implicit agreements through regulations. The relationship between an employer and an employee is typically implicit. Employers hire someone and expect them to perform duties in exchange for compensation. While companies may have employees sign a contract or paperwork, the employment relationship can be severed by the company at any point as long as it doesn't violate employment or discrimination laws. On a given matter, an implicit agreement typically gives way to an explicit contract when one exists.

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