Agreements vs Contracts: The Key Differences
While we often use the words “contract” and “agreement” interchangeably in casual conversation, when speaking legally, they are two very different things.
A legal agreement can be informal, meaning nothing needs to be witnessed or written down. A contract, on the other hand, is both more formal and legally binding—which means it 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?
Like we said before, agreements are often informal. They are a less rigid and formal type of contract: simply, they are an understanding or arrangement between two or more parties, often referred to as "handshake agreements.”
Agreements are typically verbal. In many places, they are legally binding.
When are verbal agreements not legally binding? In the United States, a verbal agreement isn’t legally binding when it involves:
- The sale or transfer of an interest in land or real estate
- Terms that outlast the lifetime of one of the parties (e.g. copyright)
- Selling goods valued greater than $500
- Marriage or divorce agreements
- Terms that will take longer than one year to carry out
- Someone’s promise to pay someone else’s debt
Chances are, your verbal business agreements aren’t legally binding because due to that third point: you’re probably selling goods for more than $500.
In other parts of the world, like the United Kingdom, when two or more parties agree on services and payment for those services, the contract is binding. Exceptions apply to property purchases or rental agreements, consumer credit contracts and intellectual property rights.
The biggest trouble with verbal agreements is that they’re hard to enforce. If there’s no record, courts can’t demand that both parties adhere to the terms of the agreement. Even with verbal agreements, it is important to keep records in place so that no party forgets the terms.
However, 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
- 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 ad hoc 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, 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.
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.