Binding Clause: Everything You Need to Know
Binding clause binds the parties to perform their duties in a way that benefits the other involved parties and legally binds them to the terms of the contract. 3 min read
2. Degrees of Binding and Non-Binding Commitments
3. Drafting Techniques
Updated November 6, 2020:
A binding clause binds the parties involved in a contract to perform their duties in a way that benefits all of the other involved parties and legally binds everybody to the terms of the contract. In most cases, it's not necessary to include a binding clause in your contract.
Binding Effect Clause Definition
The Binding Effect, sometimes referred to as "Successors and Assigns," says that the agreement to which it pertains benefits all of the parties involved and legally binds them to the agreement. In addition, any successors or assigns that may arrive are equally benefited and legally bound to the terms of the agreement in question. A binding effect clause is used to bind non-assigning parties to perform certain obligations in a way that benefits the assignee. As a result, the assignee is also bound to perform in a manner that benefits the non-assigning party.
It's worth noting that including the binding effect clause isn't necessary with most contracts. In fact, including a clause of this nature is a great example of contract bloating and how it can persist when documents are copied, pasted, and re-used.
Degrees of Binding and Non-Binding Commitments
Most people aren't aware that there are, in fact, two kinds of agreements:
- Binding agreements
- Non-binding agreements
If you're not prepared to agree to a binding contract with somebody, you may want to consider making use of some sort of non-binding agreement. The reasons that people choose to do so can vary quite a bit. Some examples include:
- The transaction is too complex to negotiate in a single agreement.
- The involved parties have not completely agreed on how the transaction should be structured.
- The transaction in question isn't yet under the right conditions to completely pursue; however, discussions pertaining to the transaction have reached the point that it has become prudent to begin outlining how things might proceed.
- Another agreement pertaining to the transaction has been entered into but certain obligations can't be agreed on until the original contract has been completely performed and all involved parties can determine the level to which the terms of the contract were adhered to.
Out of these examples, the first three may warrant one or all of the following:
- A term sheet
- A letter of intent
- A memorandum of understanding
The last example is found quite often in:
- Binding joint-venture agreements
- Joint-development agreements
- Master service agreements
- Other types of long-term relationship agreements
In agreements of the nature of those listed above, the language pertaining to intent will likely look very similar to contractual guidelines due to the fact that they are anticipated steps that outline:
- Milestone deliverables
- Non-binding intentions
- An 'agreement to agree' to the non-binding agreement in question
A lot of attorneys are probably a bit too cautious when it comes to writing letters of intent and term sheets. It's not uncommon to see them repeat the non-binding nature of an agreement in every provision listed in the agreement in question. As a result, the entire document becomes rather difficult to read.
A few good techniques exist to make a solid, functional, non-binding agreement or document, other than specifically stating this in the document itself. To properly establish that a term sheet or letter of intent is to be considered non-binding, it's a good idea to:
- Be as selective as possible when stating intentions as opposed to obligations
- Be as consistent and accurate as possible in your language as it pertains to intentions and obligations
- Include a conditions precedent
- State the specific issues that need to be agreed upon for the agreement to exist
When it comes to accuracy and selectiveness, the person drafting the agreement should do their best to focus on the provisions that matter most and reflect them using language that can be easily translated as non-binding. For example, a non-binding letter of intent will state that the parties involved in the agreement "intend" to do something and will avoid specifically stating that they "agree" to anything. In addition, the letter of intent may refer to additional provisions that won't be elaborated on or inserted until definitive agreements are made.
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