Whether a legal process is binding or nonbinding makes a significant difference. In contract law, nonbinding agreements are generally used in the form of letters of intent or memorandums of understanding. Their purpose is to clarify an existing or proposed legal arrangement without holding either party responsible for the text of the document. Also, binding agreements are what you would generally refer to as a "contract" or "agreement." Binding documents are enforceable at law. Similarly, the terms nonbinding and binding have similar significance in arbitration proceedings.
Binding Contracts or Agreements
Binding legal documents are, in essence, contracts or agreements. Binding 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. The term "parties" and verb phrases such as "shall agree" also create the presumption that a document is legally binding.
Nonbinding Letters or Memorandum
Nonbinding documents often take the form of letters of intent or memorandums of understanding. These documents serve to clarify and/or explore a relationship two or more parties wish to develop. Nonbinding communications are useful in a possible future legal relationship between the interested parties. However, when drafting such communications, it is important to avoid using language that courts may find presumptive of a binding agreement. Furthermore, the parties typically agree or disclose, in writing, that the document is not 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. 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.