What is a binding vs. non-binding contract?

Take a look at the differences between binding and non-binding contracts and learn what makes a contract legally enforceable.

What is a binding contract?

Understanding the difference between a binding vs. non binding contract is critical to ensuring that your interests are protected as much as possible.

A “binding contract” is any agreement that’s legally enforceable. That means if you sign a binding contract and don’t fulfill your end of the bargain, the other party can take you to court. You might encounter binding contracts frequently, whether you’re signing a rental lease agreement or just bought a car.

Binding contracts must be drafted properly in order to protect the interests of all involved. If you enter into a contract, you should consider having a lawyer review it to ensure that your interests are protected.

What makes a contract legally binding?

To make a contract legally binding, it needs to include several key elements:

• Offer and acceptance — One party needs to offer something (money, services, rights, etc.), and the other party needs to accept the offer.
• Consideration — The benefit that both parties receive. This can be money, services, items, or anything of value.
• Mutuality or intention — The understanding that both parties expect to be bound by the contract and to fulfill their end of the bargain.
• Legality — The contract has to obey all federal, state, and local laws. You can’t make a contract for something illegal.
• Capacity — All parties are legally able to sign the contract (for example, a person’s age might make them ineligible to legally sign a contract).

If a contract contains all these elements, it can be considered binding and legally enforceable.

Understanding the difference between binding vs. non-binding contracts can actively limit your liability as a consumer or seller.

When does an informal contract become binding?

Informal contracts are common among smaller sellers or in interpersonal relationships. However, they can be ambiguous, which can lead to legal concerns down the line. Learning binding vs. non-binding contract requirements and what makes a contract legally binding can help to protect your interests at every point in the sale process.

Informal contracts generally become legally binding contracts when there is:

• Mutual assent: This is fairly objective and can be shown when both parties agree to a singular offer. This can be either simple or complex.
• Consideration: This element conveys the intent between both parties toward the agreement. It’s a legally required, main element to any contract.

If you are in an agreement of any type with these two elements present, you may consider engaging a lawyer to help you to draw up a legally binding contract that’s been formalized.

Are verbal contracts binding?

Verbal contracts can be difficult to prove as legally binding. If you ever enter into a verbal agreement, it can be helpful to have your lawyer draw up a formalized contract outlining the clauses you wish to agree to.

For a verbal contract to be considered a legally binding contract, it generally requires two main elements and a single action: consideration, mutual assent and an acceptance that is indicative of the verbal mutual assent element.

If you’re unsure if you’re in a legally binding verbal contract, or what makes a contract legally binding in your specific case, you should connect with a lawyer for further context and clarification.

What is a non-binding contract?

A non-binding contract is any contract that’s either missing one of the elements required to be binding or includes non-binding language such as “this contract is non-binding.”

Non-binding contracts are typically used when two parties want to put down preliminary discussions on paper to make sure they’re on the same page, but don’t want to explicitly agree to anything yet.

A letter of intent is a good example of a non-binding contract.

Additionally, in non-binding agreements, there’s no legal obligation on the behalf of any party to any terms listed, as there’s no formal agreement that’s been made. You can ensure that this is clear by avoiding common phrasing that could be misconstrued as a binding agreement. These types of clauses can include:

• Limiting language. Any language that notes an “acceptance” or a deadline to accept could be misconstrued as a binding contract element.
• Terms that include “good faith.” This is a common phrase seen in binding contracts that can muddy the water when you use it in a legally non-binding way.
• Terms that dictate termination needs. In a legally non-binding contract, it’s important to make it clear that any party can terminate at any time. There should be no binding element or language used if you’re creating an informal agreement.

As a proper practice, you might consider putting a clause explicitly stating the non-binding nature of your agreement. This can help to eliminate any potential liability or confusion.

Sign contracts legally online.

While there are several differences between binding vs. non-binding contracts, there’s one thing every contract needs: a signature.

To make signing contracts simple, use online signatures with a program like Acrobat Sign. You can add legal signatures to Word documents, PDFs, and more quickly and easily right from your computer or other device.

You can also seamlessly integrate Adobe with any of your favorite pre-existing software options, including Dropbox, Microsoft Office Suite and Google Suite. This puts hours back in your day and makes sharing a seamless process — allowing you to connect with your signees in a matter of minutes.

Learn more about what Acrobat Sign can do to simplify contract creation.