The Difference Between Binding & Nonbinding

Of all the types of legal jargon, this one is actually quite straightforward: binding means you're legally obligated to something, whereas nonbinding means you aren't. For example, a decision made in "binding" arbitration proceedings will be final and enforceable by the courts, but a "nonbinding" arbitration decision could be reversed by a later court proceeding or in binding arbitration. Sign a binding contract, and the other party can take you to court if you don't do something you said you'd do. Nonbinding documents, by contrast, are really just information. They are intended to clarify and explore the terms of a deal.

When you sign a legal contract or agreement, you're agreeing to be bound by its terms. Once the parties make an agreement and put it in writing, and the party to be charged by the document signs the agreement, the parties are bound by the contract. In other words, you've agreed to a set of legal obligations. If you don't perform your side of the bargain, the other party can take you to court and ask the judge to force you to do what you said you were going to do.

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 agreements 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 contract can help develop that relationship by documenting their intentions. Crucially, neither party expects to create a legal relationship. If one party fails to perform his side of the bargain, the other person may be angry, but there's nothing legally he can do about it.

Nonbinding communications are useful when you're negotiating a possible future legal relationship between the parties, for example, your wish to explore the possibility of a partnership or merger. If you are drafting a nonbinding communication, it is important to avoid using language that courts may find presumptive of a binding agreement. Be sure to make it clear that the document will not be binding.

You might also come across the word "binding" in the context of arbitration. 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. An arbitrator's decision in a binding arbitration proceeding more or less has the same effect as a court order.

Read More: What Makes a Document Legally Binding?

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 trial during a lawsuit. 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.