Agreements vs contracts: what are the differences?

Agreements vs contracts: what are the differences?

Contracts and agreements are often used interchangeably, but legally speaking, they are two very different things. An agreement can be informal, meaning nothing needs to be witnessed or written down while a contract agreement is more formal and legally binding therefore must be documented. Both an agreement and contract represent specific arrangements between two or more parties. The main differences lie in their flexibility and enforceability. 

What is an agreement?

An agreement is a less rigid and formal type of contract, simply an understanding or arrangement between two or more parties, often referred to as “handshake agreements”.  

Agreements are typically verbal, but this does not mean they can’t be legally binding like a written contract.  

However, the difficulty with a verbal agreement is if one party to the agreement seeks to withdraw on the agreement reached and denies that any such conversation took place there is nothing that assertively requires the parties to obey the terms. Instead, they are reliant on all parties honoring the agreement. If the agreement took place some time ago, people could make honest mistakes if they forgot what was said. 

If two parties have established confidence and trust in one another, a non-contractual agreement can be the way to go, saving time and money and allowing more flexibility. 

Benefits of an agreement: 

  • Quick and simple 
  • Informal  
  • Flexible in nature 

What is a contract?

A contract is a written document that lays out the duties, responsibilities, and commitments both parties must adhere to. It's a way for everyone to remember what was agreed to, especially in complex deals, and protects everyone involved if something goes wrong. 

Contracts are formal and legally binding agreements. The entities involved can use them as supporting evidence if one of them fails to comply with the rules. If one-party breaches the contract or fails to properly perform their end of the deal, the other party can take legal action. 

Benefits of a written contract: 

  • Legally enforceable 
  • Tangible proof 
  • Minimizes risk and disputes 
  • Can be quick if a template/online portal is used 
  • Makes terms and responsibilities clear 

What makes a contract legally binding?

Creating a strong written contract relies on using specific and clear language that can't be misconstrued in any way, especially if a dispute was to arise. That’s why a contract can only be legally binding if the following requirements are present: 

  • Offer and acceptance (When one party presents something of value and the other accepts) 
  • Consideration (Each party must exchange something of value) 
  • Legality (The purpose of the agreement must not violate the law) 
  • Capacity (Both parties must be capable of understanding the terms and conditions outlined in the contract) 
  • Mutual assent (encompasses the consent of both parties and their wish to enter into an agreement) 

Why is it important to have a written contract for B2B deals?

Very often contracts for rebates and B2B deals are created and then negotiated in a rather adhoc fashion, with information distributed in long email chains and documents stored in various places. When it’s time to make a rebate claim, companies often find that the supplier has a different understanding of the deal structure and therefore disputes the claim, therefore delaying the deal. Other times they may find that they had not signed off on the deal correctly or the person who did sign it off wasn’t authorized to do so.

That’s why it is important to remember if the contract has gone through several rounds of revisions, which tends to happen with deal negotiations, don't just assume that the contract put in front of you to sign is the correct version. Before you sign it, be sure that you fully know and understand the terms of the document, it’s dated, and each person has the authority to sign on the dotted line. 

To summarize

The key difference between contracts and agreements is that a contract is a form of agreement that is always legally enforceable. An agreement can be a contract, as long as it has all the elements of a contract that makes it enforceable. 

There is no doubt that when managing millions of dollars in rebate if you have a choice between signing a contract or coming to an agreement, you should always choose the contract for extra protection. Agreements are fine if you have a solid trust between trading partners, but they leave you open to not being able to seek legal support should the rebate deal go awry. 

With Enable, every detail of the deal is recorded in the system first, and from that the contractual agreement is created – not the other way around. There is workflow to control the sign off process, a clear audit trail of what has been said and changed. There are no separate documents needed, and in summary, everyone involved sees just one version of the deal.

Elizabeth Lavelle

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