Difference between Binding vs Nonbinding contracts?
In: 3
Binding means that one or more parties are legally required to perform some activity. If they fail to do so, they can be taken to civil court to be forced to comply and/or pay penalties for failure to do so.
Non-binding is the opposite – the party is **not** legally required to perform some action. The agreement merely documents the party’s intent to do something, but it is not enforceable.
You see them a lot in sales. A party will issue a letter of intent outlining the terms of a deal that they find agreeable and both parties will negotiate those terms. The LOI is non-binding – it is just a starting point for discussion to arrive at final terms.
Once those terms are negotiated, the parties will sign the formal contract, which is legally binding to both.
So, for example, if I were trying to buy a business, I would issue a LOI stating what I want to purchase, what I am prepared to pay, what date I would like to close, and any other stipulations for the sale. This isn’t a legal promise to purchase at those terms – it is just me putting down on paper what I would like to do. I’d then negotiate those terms with the person selling. When all the details are ironed out, we’d draft a formal contract for sale – when that I signed I am now legally bound to buy the business at the terms stated and would be the legal owner – I can’t decide later that I don’t want to buy anymore.
Latest Answers