Binding Vs. Non-Binding Contracts

You may have noticed the words binding and non-binding often
come up when researching legal documents, and might have wondered what the
difference is between the two terms. Whether a legal document is binding or
non-binding is an important distinction to make, as it may affect whether that
document is legally enforceable in court.

In this post, we define the terms binding and non-binding,
and discuss how legal documents with these terms can be different from each

What is a Binding Contract?

A binding contract typically includes key elements that make the contract valid, such as:

  • Offer and
    . When one party presents something of value that they wish to
    exchange with another party for something else of value, that is an offer. Once
    value is offered, it must either accepted or declined.
  • Consideration.
    The benefit that both parties gain or receive is from the contact is generally
    the consideration, which can be monetary or even a service, object, or anything
    else that holds value.
  • Mutuality
    or intention
    . Simply put, this term means “meeting of the minds”, which is
    a phrase that means all the parties involved in the contract intend to create a
    valid, enforceable agreement.
  • Legality.
    In order for a contract to be valid, it must not contain unlawful promises or
    consideration. A common example of unlawful consideration is a promise to do
    something that is against the law, such as commit a crime.
  • Capacity.
    Capacity means that a person signing the contract has the legal ability to do
    so. For instance, a minor generally isn’t considered as having the capacity to
    legally sign a contract.

Generally, a contract is considered binding when it includes all of these elements, and doesn’t contain invalidating issues that could lead to things like undue influence, coercion, or duress.

What is a Non-Binding Contract?

A non-binding contract is an agreement that has failed
because it is either missing one of the key elements of a valid contract, or
the contents of the contract make it so that the law considers it unenforceable.

For instance, a Letter of Intent is often used by parties that want to record some preliminary discussions to make sure that they’re both on the same page so far, but they deliberately don’t want to commit to a binding contract yet.

Enforceable Promise vs. Unenforceable Promise

If we boil down contract
to its most simplistic definition, then a valid contract (or binding contract)
is basically just an enforceable promise.

An enforceable promise
in a contract is a promise or a set of promises that all parties in the
contract agree will be fulfilled, provided the contract contains all the
necessary elements.

If the promise presented in the contract can’t be enforced
by a court of law, then it’s generally because the contract doesn’t contain the
necessary elements, which makes it an unenforceable
or non-binding contract.

In short, whether a contract contains enforceable promise(s)
or not affects whether it is binding or non-binding.

Navigating Contracts

In order for a contract to be considered binding, it must
include the basic elements of a contract, including offer and acceptance,
consideration, mutuality or intention, legality, and capacity. If a contract
includes all of these elements, it is most likely a binding contract. If the
agreement is missing one or more of the basic elements, it is probably a
non-binding contract.

The difference between binding and non-binding contracts is
important to know so that you can be as informed as possible when you sign your
next legal document.

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