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Binding vs. Non-Binding Contracts: What’s the Difference?

Whether you are leasing a car, renting a home, or working out an arrangement with vendors, you will have to deal with contracts at some point. These agreements are there to protect your interests or ensure you are meeting your obligations.

If you own a business, you must constantly rely on contracts to enforce workable deals with your employees, contractors, banks, landlords, utility companies, and customers. To a certain extent, they become the lifeblood of your business.

But not all contracts are legally enforceable. Some agreements don’t have the necessary elements to make them binding. So, how can you make sure you have the form of contract you need? Let’s define a binding contract and a non-binding one, and pinpoint the difference between them. 

What is a binding contract?

How do you define a ​​binding contract? A binding contract is an agreement between parties that legally obligates them to fulfill the outlined transactions, duties, or services. If one party fails to honor the agreement, the other party can take the issue to court. 

Examples of a binding contract

So, what are the different types of binding contracts? 

  • Fixed-price contract. This type of contract is ideal for arrangements where the resources used for the undertaking do not determine the payment amount. The seller simply determines the total allowable costs of resources to complete the project.
  • Aleatory contract. Commonly used in insurance policies, an aleatory contract only obliges parties to perform required actions when a triggering event happens. The trigger must be something that neither party can control.
  • Bilateral contract. Typically used in sales deals, bilateral contracts involve parties exchanging promises to fulfill specific actions. Both parties have obligations to perform and value to gain from the agreement.
  • Unilateral contract. In a unilateral contract, a party promises to compensate another after the latter has performed the required service or action. There’s usually an open request that individuals can respond to, fulfill the requirements, and then receive the compensation.

Some undertakings have such high stakes you simply can’t do without the law protection. But not all agreements require such a level of rigidity. Let’s talk about the contract that does not involve any legal implications.

Non-binding contract definition

A contract is considered non-binding if it explicitly contains language that renders it non-binding or if it lacks any of the key elements that make it binding. 

Two parties may use a non-binding contract to record preliminary discussions and ensure they agree with the terms without legally committing to them.

A contract is considered non-binding if it explicitly contains language that renders it non-binding or if it lacks any of the key elements that make it binding. 

Now that you know the definition of a non-binding contract, let’s explore how you can differentiate a binding contract from a non-binding one. 

What makes a contract legally binding?

So, when does a contract become legally binding? Here are the elements to look for in an agreement.

Capacity

All parties to a contract must have the capacity to understand its terms and must freely give their consent. The agreement can’t involve coercion, undue influence, or fraud. 

A contract is considered voidable if a person lacking in contractual capacity is a party to it. 

The following classes of people are considered incapable of entering a contract:

  • Minors. Children under the age of 18 lack contractual capacity and can void an agreement. This rule makes an exception for contracts involving necessities like food, shelter, and clothing. 
  • Mentally disabled individuals. People who lack the mental capacity to understand the terms of an agreement can’t enter a contract and are allowed to void those they’re already party to. Exceptions are granted to contracts that involve necessities.
  • Intoxicated individuals. People under the influence of alcohol or drugs cannot enter an agreement, as they may not fully grasp its meaning and effect.

The law protects individuals from being bound to an agreement that takes advantage of their vulnerability. Hence, failing to meet this element can render a contract void. 

Legality

A contract isn’t valid if it contains terms inconsistent with the law. For example, a contract is non-binding if the agreement stipulates that a party must rob a bank to get paid. The unlawful condition renders it null and void. 

Consideration

People enter a contract because of the consideration or the value it provides. Contractual consideration can come in the form of services, property, or protection from harm. In some cases, it is a promise to refrain from doing a certain action.

Mutuality

Your contract must reflect a “meeting of minds” between the parties. That is, both parties must be bound to the terms or obligations mentioned in the agreement. 

If one party has an undue advantage over the other, such as the option to cancel the agreement, then the court will have room to reconsider the contract’s validity. 

Offer

An offer is made when one party presents something of value to the other party. For the contract to be binding, the offer will have to be accepted by the other party, who also brings something valuable to the table.

An offer is essentially a statement of the terms that the offerer agrees to honor or to be contractually bound to. The court differentiates it from pre-offer negotiations that do not establish an intent to enter a contract. 

An offer is also distinguished from an “invitation to treat,” which merely serves as a request to make an offer. Advertisements and catalogs, for instance, may present the specifications and prices of a product but don’t constitute an offer.

Acceptance

Acceptance of an offer establishes the offeree’s willingness to honor the terms of the agreement. It should be carried out as specified in the contract. In the absence of any specifications, the acceptance must be made in a way that’s deemed reasonable.

If the offeree does not accept the offer in its entirety or chooses to change certain aspects of the agreement, a counter-offer is made, which could invalidate the original offer.

In bilateral contracts, both parties provide explicit promises to perform. On the other hand, a unilateral contract acknowledges acceptance once the offeree performs their obligations.

To sum up

Legally enforceable contracts can help you go after the other party if they fail to meet their end of the bargain. As long as the contract has all the elements needed to make it legally binding, you can use the power of the law to enforce its terms and conditions. 

The right tools can help ensure you’re not setting up contracts that might work to your disadvantage in the long run. Explore how the AXDRAFT document automation software can create any type of contract effectively and quickly. Check out the free demo.

FAQ

What is the difference between a binding contract and a non-binding contract?

Put simply, a binding contract is legally enforceable, while a non-binding agreement does not involve any legal obligations. When you sign a binding contract, the other party can take you to court if you fail to meet your obligations. 

Non-binding contracts, on the other hand, are mostly just made to clarify the terms of a deal.  

Which elements are required for a contract to be legally binding?

Contracts need to contain the following elements to be considered legally binding: 
– the capacity of the parties to fully understand and consent to the terms
– consideration or value provided to both parties
– legality of the stipulated conditions or obligations
– mutuality of the agreement
– the establishment of the offer and acceptance of the terms and conditions

Does a contract have to be notarized to be legally binding?

Unless state or municipal law requires, contracts don’t have to be notarized to be legally acknowledged. Generally speaking, real property deeds and debt agreements need to be notarized, while petitions, motions, and contracts for the sale of goods can do without it. 

Can a binding contract be broken?

You can legitimately break a binding contract if the other parties consent to it. Make sure you put their consent in writing. 

You may also break an agreement if you are willing and ready to accept the stipulated penalties. For example, a franchisee may choose to end their contract with the franchisor even if it means paying the necessary compensation.

Some contracts have an opt-out option that allows you to break the agreement within a certain timeframe and without incurring any penalties. 

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