A binding contract is a legal document outlining an agreement between two parties that may be enforced by the law courts if they are broken. By entering into an accord of this type, the parties are said to be “bound” by the agreement.
Sometimes known as “legally binding contracts” these documents create a legal obligation to fulfill the duties, services, or transactions they outline. They are widely used in both daily life and business settings.
Understanding how these agreements work is essential if you are planning to create your own written contracts. Read on further to learn what binding contracts mean for the parties entering into them and how they can be enforced if they are broken.
How Do Binding Agreements Work?
Legal contracts are used in all walks of life to create trust and set expectations about the nature of an agreement. Their power comes through their legal enforceability and ability to hold individual parties to account if they fail to fulfill their stated obligations.
Most companies will sign contracts like service agreements to enforce the provision of supplies and services for specific prices for a set term. However, it’s likely you’ll also often encounter written agreements such as employment contracts, lease agreements, or independent contractor agreements in your day-to-day life too.
What Information Needs To Be Included in a Binding Contract?
In order for a contract to be usable in practical terms, it must outline some key information about the people it will bind and the agreement it will oversee. A fully enforceable contract should always include the following:
- The names of the parties covered by the contract.
- The state’s laws that will preside over the agreement.
- The service, product, or monetary amount that will be exchanged.
- The obligations both parties will need to meet.
- The start and end dates of the agreement.
- What penalties either party will face if they break the contract.
- The signatures of both parties.
What Can Invalidate a Binding Agreement?
A legally binding agreement is only truly effective if it involves an enforceable contract. The signing parties may make a promise in writing but that doesn’t always mean that the document can be used as intended, nor create a legal obligation if it isn’t completed properly.
In some cases, contracts are worth no more than the paper they are printed on. This is especially the case if any of the following invalidating situations is true:
- One of the terms of the contract is illegal.
- The terms aren’t clearly defined or are too broad in scope.
- Information in the contract is entered incorrectly.
- They have been signed by someone lacking legal capacity.
What Happens if You Break a Binding Contract?
Breaking a legally binding contract can have serious consequences. If the breach of the terms can be demonstrably proven, the injured party can take you to court and you may face fines or other penalties.
Usually, written agreements such as these will include details on options such as Alternative Dispute Resolution (ADR) to provide opportunities to resolve disagreements without taking more serious action. They will also give an outline on sanctions that can be fairly applied if a party does not hold up their side of the contract.