An agreement in principle is an agreement that makes the major terms clear, laying the groundwork to make a contract. Agreements in principle are not legally enforceable as a general rule because they are not formal contracts, although sometimes they will be used in legal cases if there is a dispute. For people outside the legal field, this type of agreement can be confusing because it may make it seem as though everything is agreed when this is not actually the case.
When two parties are working together to reach an agreement, they often have a great deal of debate about the major points and terms, especially when the agreement surrounds a contentious issue. The process of nailing down the basics of the agreement leads to an agreement in principle, in which both parties arrive at a set of generally agreed-upon terms that will be used in the final contract. This is essentially the foundation of the contract, used when drafting the language because it includes everything the parties have negotiated.
A number of things can upset an agreement in principle. For example, when a bank reaches one with a customer and pre-approves a mortgage, the bank may later decide after additional investigation to change the terms, offering less money or a higher interest rate on the basis of newly learned information about the customer. Likewise, when diplomats reach this sort of agreement with their negotiating powers and take it home, government officials may reject or request modification to some of the terms.
The agreement is not legally binding because it has not been finalized. However, it indicates that the two parties have reached some level of consensus and that they intend to move forward with a contract. As a result, backing out of the agreement or radically changing the terms may be viewed as an activity in bad faith. For example, when a country reaches an agreement in principle with another and then reneges, it can make them look bad in the eyes of the international community.
It's important to note that the term is “agreement in principle,” not “agreement in principal.” These two homonyms are often confused, even by experienced English speakers. In this case, it can help to remember that it is the principles of an agreement that are included in the document.