Non Binding Contract: Everything You Need to Know
A non binding contract is an agreement in which the parties are not legally obligated to carry out its terms.3 min read
A non binding contract is an agreement in which the parties are not legally obligated to carry out its terms. Their purpose is to state the parties' intention as part of the negotiation process. If both parties agree to the terms of the non-binding contract, they can sign a binding contract afterward. There are also other situations in which a contract may be non-binding.
Letter of Intent
A letter of intent is a type of non-binding contract. Either party can walk away from the agreement at any point without signing a binding contract. It may be signed at the beginning of the parties' relationship when they are getting to know one another.
Letters of intent should include language saying they are specifically non-binding. If you write such a letter, make sure to place the words “non-binding” in the first paragraph. If it's being sent by email, make sure “non-binding” is in the subject line as well. Also, include a statement indicating that neither party will be forced to sign a binding contract unless they are completely satisfied with the agreement.
Even a non-binding letter of intent may include provisions that are legally binding, such as a provision requiring confidentiality and non-disclosure of the letter's contents.
Binding vs. Non-Binding Contracts
A contract may be written or spoken; it states specific obligations between two or more parties. If it is binding, it can be enforceable either through state or federal court. In order for it to be legally binding, however, there are certain elements that must be in place:
- Each of the parties who take part in the contract must understand and agree to the provisions and terms of the contract.
- The contract must include an offer, which the other party or parties must accept.
- The parties in the contract must exchange consideration, which is an item of value, a service, or money. In some cases, it may be only one party who is required to give consideration.
Even if these elements exist in the contract, there are conditions under which the contract would still be non-binding. For example:
- Contracts may not be made by the use of fraud, threats, or coercion.
- Contracts must be thoroughly explained to and understood by all involved parties.
- Contracts may not include any criminal activity or anything that is illegal.
Can a Non-Binding Contract Be Enforced?
A letter of intent is often the first written document that is exchanged and signed by parties to an agreement. It summarizes the terms of the agreement and serves as a reference point for further discussion and negotiation. It is typically identified clearly within the document as being non-binding.
These agreements are usually recognized as non-binding unless they include a provision that specifically states that it is binding, and no liability exists by either party, even if no final agreement is reached and nothing is exchanged.
However, there is legal precedent for enforcing certain non-binding agreements. In these cases, the judge interpreted the non-binding provisions of the letter of intention as binding because the parties should have agreed to those provisions in good faith. To prevent this, pay attention to the location representing the agreement's governing law, because states may interpret non-binding agreements differently.
Combining Binding With Non-Binding Provisions
Sometimes parties are willing to make a binding contract but have yet to iron out every detail of the agreement. In such cases, which are usually complicated and large in scope, it is not unusual to have a document that includes both binding and non-binding provisions.
The transaction may be subject to important conditions, and it's beneficial to outline the procedures for addressing them. There are times when it's important to have such a written agreement, but parts of it may not be agreed upon if other obligations have not been met or milestones in the process achieved.
Attorneys are cautious when drafting letters of intent that include both binding and non-binding provisions, and due to an abundance of caution, they can be difficult to read. It's important to keep the following recommendations in mind:
- Be accurate and consistent with the wording of each provision and be careful about which are intentions and which are obligations.
- Include conditions precedent for the provisions to be binding.
- Thoroughly explain what needs to be done in order for a binding agreement to take place.
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