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An ‘agreement to agree’ is likely to fall under the definition of a non-binding contract. Non-binding contracts may not have the same legal effect as binding contracts, however they can still be extremely useful.
What Is The Difference Between A Non-Binding and Binding Contract?
An agreement will either be binding or non-binding. The key difference between the two terms is their enforceability.
A binding agreement can be enforced through the law, and failure to comply with it can lead to serious penalties (depending on the severity of the breach). However, a non-binding agreement cannot be enforced through the courts. There are essentially no legal consequences for not following through on a non-binding contract.
Non-binding contracts are generally useful for situations where you want to set out certain terms for a specific arrangement, but there’s still some uncertainty around certain matters. So, a non-binding agreement is a way for you to discuss things in the early stages before it’s actually set in stone.
What Is A Contract?
A contract must meet a specific criteria to be considered legally binding. In essence, it must contain a proposal with mutually agreed upon terms. All parties must understand the terms of the contract and have the capacity to enter into a contract.
Put simply, a contract is an agreement, but you can’t expect to enforce it or face legal consequences if it is not legally binding.
Consent needs to be given freely and all parties signing a contract must have legal capacity by age and presence of mind. To summarise, a contract must contain all of the following elements:
- Offer and acceptance
- Intention to be legally bound
- Consideration
- Free consent
- Legal capacity
If any of the above criteria are not fully met, a contract cannot be considered legally binding. To determine whether a contract is non-binding, it’s important to first understand what makes a contract valid in the first place.
When Is It Non-Binding?
A contract will not be binding for two main reasons:
- It does not comply with all the factors needed to be a binding contract.
- The agreement was designed to be non binding.
Unfair Contract Terms
Unfair contract terms will also render a contract non-binding. A contract cannot be legally binding if it contains clauses that will cause harm to one or more of the parties to the contract. The Australian Competition and Consumer Commission (ACCC) defines unfair contract terms to be:
- A term that allows one party to underperform or completely avoid their obligations.
- A term that only allows one party to terminate the contract.
- Penalties for breaches that only apply to one party.
- A clause that enables one party to change the agreement at their will but not the other.
| Example Leo has contracted Taylor and her band to play live music at his restaurant’s Friday night event. The discussion takes place over text messages which are considered their written agreement. Taylor agrees to play for 3 hours on Friday night at Leo’s restaurant. The two discuss song choices and breaks. When Taylor mentions payment, Leo offers the band a free meal and claims, ‘The exposure will be great for them’. Taylor reiterates she will be needing appropriate payment to play for Leo. However, Leo continues to refuse to pay Taylor and insists that she is in no place to negotiate. Luckily for Taylor, their agreement was not binding as she was not offered adequate consideration for her work. Accordingly, it constitutes an unfair contract term and is not enforceable. |
Initialling A Document
Initialling a document is another way of indicating you are happy with the terms of the agreement, prior to formally signing the agreement. An initial is not the same as a signature – rather, it’s a personal mark that is made at the bottom of all or certain important pages on an agreement. It will demonstrate that a signee has read and understood what is on the page.
Initials add the benefit of ensuring that a specific page cannot be tampered with once it has the signer’s initial. It can be used on both binding and non-binding agreements. For non-binding agreements that have been created as a document prior to signing the formal agreement, the use of initials ensures that all parties have demonstrated their agreement of any specific clauses, which can be useful when a dispute arises.
E-Signatures
If you’re looking for an e-signature tool for your business, you’ve come to the right place. We’ve had a number of clients providing valuable feedback, and from this, we built our very own E-Signature Tool which you can access as part of our Sprintlaw Membership.
So, what would this mean for you?
Using our E-Signature Tool means you can keep all of your documents in our online portal and send them off to the people you work with. This way, you can keep track of your key contracts and important details, like when they were signed. When you enter into contracts with other parties, both of you will have copies of the final, signed document.
Essentially, our tool helps your business stay on top of your legals by building an efficient method of sending and signing documents electronically. You won’t have to worry about your electronic contracts being invalid – chat to our friendly team today to learn more.
What Are Some Common Non-Binding Agreements?
A non-binding agreement is a great way to set the terms of your contractual relationship prior to signing a formal agreement. Having one drafted will get all the main terms on paper where all the relevant parties can have a read of it and discuss anything they would like to change. This is a great way of ensuring nothing gets lost in communication and everyone is on the same page before things become official.
Heads Of Agreement or a Memorandum of Understanding (MoU): It’s always advisable to have one of these agreements drafted prior to signing a contract. A Heads Of Agreement or an MoU will contain the basic terms of the agreement, obligations, duties, information on the parties to the contract, dates, expectations, finances and anything else that can be considered relevant. However, it is not legally binding.
Founders Term Sheet: A Founders Term Sheet is usually specific to startups that are raising capital by attracting investors. The agreement sets out the parameters of the relationship between the parties as well as important financial information that will help potential investors make an informed decision.
Need Help?
A non-binding agreement may not be legally enforceable however, that does not mean it is deprived of value. If you would like to have a non binding agreement drafted, get in touch with us today. Our lawyers are experts in drafting both binding and non-binding agreements for clients to best meet their needs.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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