Whether a legal process is binding or nonbinding makes a significant difference in your rights to challenge the process. In contract law, nonbinding agreements are generally used in the form of letters of intent or memorandums of understanding. These types of documents are intended to clarify an existing or proposed legal arrangement without holding either party responsible for the text of the document. This means they are not legally enforceable in court. In contrast, binding documents such as contracts and agreements are enforceable by law. Similarly, the terms nonbinding and binding have similar significance in arbitration proceedings.
Binding legal documents are legally enforceable in court. In contrast, nonbinding documents simply state the parties' intentions, but are not enforceable. Similarly, decisions made in binding arbitration proceedings are final, but nonbinding arbitration decisions may be reversed by a later court proceeding or binding arbitration.
Binding Contracts or Agreements
Legal contracts or agreements are binding documents. This means that the documents create legal obligations that either party involved in the agreement can enforce at law.
Terms such as "agreement," "treaty," or "contract" typically form the basis for a binding relationship. When you see terms like "parties" and verb phrases such as "shall agree", you can presume that the document is legally binding unless the document specifically states otherwise.
Nonbinding Letters or Memorandum
Nonbinding documents often take the form of letters of intent or memorandums of understanding. When two or more parties are clarifying and exploring a business relationship, a nonbinding document can help develop that relationship by documenting their intentions.
Nonbinding communications are useful in a possible future legal relationship between the interested parties. If you are drafting a nonbinding communication, it is important to avoid using language that courts may find presumptive of a binding agreement. It is also important for the document to state that the parties agree it will not be binding.
Binding arbitration is an out-of-court process that falls in the broad category of alternative dispute resolution. Through alternative dispute resolution, two or more opposed parties voluntarily agree to meet together with a neutral, third-party arbitrator who essentially acts as judge and jury.
When the parties agree to enter into binding arbitration, they must comply with whatever resolution the arbitrator deems appropriate. In some instances, the parties can move to dissolve the arbitrator's decision through court.
Nonbinding arbitration more closely resembles the process of mediation, where two parties with different positions agree to meet with a neutral, third-party adviser to resolve their dispute. Unlike with binding arbitration, decisions made in nonbinding arbitration are not binding on the parties.
Many state courts require parties to go through nonbinding arbitration before going to court. In many instances, disputes can be resolved through this process while allowing courts to conserve their scarce resource of time. Even if the parties do not reach an agreement during this process, it remains useful as a tool for the parties to better understand their differences.