To define binding law means certain requirements must be met to be legally binding. These include understanding the nature of the agreement and agreeing to do or not do certain things.

What Is a Binding Contract?

A binding contract is a written agreement between two or more parties. If one party tries to negate on its promise as set forth in the contract, a court may impose penalties.

Under federal or state law, binding agreements are enforceable. Under contract law, they're “legally binding.” In most cases, the following factors must be met for an agreement to be binding:

  • Offer and acceptance: In clear, unambiguous terms, one party makes the offer, and the other party accepts.
  • Exchange of consideration: Parties exchange something of value (called “consideration”). Otherwise, a one-sided exchange may simply be considered a gift.
  • Written form: Some agreements must be written, such as the sale of real estate.

There has to be a clear indication that the contractual parties understand the terms and that they willingly enter into the contract under the negotiated terms.

It's sometimes necessary to take a case before the court if there's a dispute between parties over whether a contract has been broken. The court can make a judgment if there's been a “breach of contract.” Judges will consider certain criteria before deciding if the contract is enforceable and whether it's been breached.

The following terms typically indicate a binding relationship:

  • Treaty
  • Contract
  • Agreement

When you see phrases and terms such as “shall agree” and "parties," you should presume the document is legally binding, unless it states otherwise.

Example of a Legally Binding Agreement

An example of a legally binding document is a lease agreement for an apartment. The lease is legally binding. When the lessor and the lessee both sign the contract, they agree to some conditions.

The lessor, or landlord, agrees to provide an apartment for a certain period of time. That apartment is to be in a certain condition. The lessee, or tenant, usually agrees to pay an agreed upon amount of rent and to refrain from destructive actions.

Another requirement for a contract to be legally binding is consideration: both parties must fully understand what they're agreeing to. If someone is coerced, tricked, or forced into entering into a contract, it's usually not considered legally binding.

What Makes an Agreement Nonbinding?

Failing to meet certain requirements can make an agreement nonbinding and unenforceable. In addition, other factors may turn an agreement that's otherwise legitimate into one that's invalid. These include the following:

  • Fraud or coercion: Threats of harm or other shows of force can't be involved when entering into an agreement.
  • Misunderstanding or mistake: If one or more parties don't fully understand contract terms, the enforceability of the agreement can be affected.
  • Illegal subject matter: Contracts for this type of matter aren't valid.

In many cases, it's not possible to enforce a nonbinding agreement in court.

Sometimes, if both parties agree, the court may allow them to amend some or all of the contract. This can save a business relationship. Other times, a judge may issue awards for damages if one party causes the other party to experience losses.

Binding vs. Nonbinding

Your right to challenge a contract depends largely on whether a legal process is binding or nonbinding.

Under contract law, nonbinding agreements usually take the form of memorandums of understanding or letters of intent. These types of documents don't hold the parties responsible for the text included in the document; instead, they're used to clarify a proposed or existing legal arrangement.

By contrast, legally binding documents are enforceable.

In arbitration proceedings, the terms binding and nonbinding have similar importance. In court, binding contracts are legally enforceable, but nonbinding documents — while they make clear what the parties' intentions are — are not actually enforceable. Likewise, decisions in binding arbitration proceedings will be final. However, nonbinding arbitration decisions can be reversed later by court proceedings or binding arbitration.

Most contracts are enforceable documents, making it especially important for all parties to understand what they're agreeing to before they sign. If you have any questions or concerns about a contract's terms and conditions, you may want to consult a legal professional.

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