What is a Legally Binding Agreement?

A “contract” is any agreement that is legally binding.

If, for example, by means of an exchange of emails, a manufacturer of a particular type of items agrees to supply and a wholesale or retail business agrees to buy a quantity that they agree upon, and they also agree the price and delivery date, that will usually amount to a binding agreement since it would be presumed by a court in such circumstances that both parties intended their agreement to be a legally binding agreement. Nevertheless, it would only be binding if certain other essential elements are also present but an explanation of those elements is beyond the scope of these pages.

The following two examples are both legally binding as “contracts” in law. The first example is of a very formal agreement. Not surprisingly this agreement is binding as a “contract” in law. However, in the second example, despite, the total absence of a formal or informal contract, order, invoice or any other paperwork, there is also an agreement which is binding in law as a “contract”.

Example 1: Two directors of a multi-national company sign and date two copies of a written agreement on behalf of their company, and then two trustees of a large UK national charity sign and date both of those copies on behalf of the charity. The agreement is in writing and it runs to 100 pages. There are two parties to the agreement, the charity and the multi-national company. The agreement comprises an arrangement under which the charity procures from the company most of the IT services that the charity needs.

Example 2: There need not be any formality for an agreement to be binding as a contract. As an example, where a private individual picks up a loaf of bread in a supermarket, walks over to the checkout desk and pays for it, there is nothing signed, nothing in writing, and no conversation or agreement between the individual and any member of the supermarket staff, yet, in law, there is a “contract” binding in law by virtue of what has occurred at the checkout.

In contrast to these examples, an example of an agreement that is not binding is a social agreement between friends. Another example would be an agreement that is a “heads of terms” agreement stating clearly that it is not binding (see “When to use (non-binding) heads of terms” below). In both cases, the agreement will not be binding because there is no “intention to create legal relations”.

Legal basics and tips to avoid some of the common problems relating to forming contracts. 

• When To Use (Non-binding) Memorandum of Understanding Templates?
• What is the Difference Between a Commercial Contract and a Consumer Contract?
• Why Have a Formal Contract?
• Creating "Formal" Commercial Contracts, and Alternatives
• Greater Risk Using Informal Contracts
• “Subject to Contract” and Converting Informal Communications into a Formal Contract