Binding contract

From CEOpedia | Management online
Binding contract
See also

Binding contracts - these are legal agreements concluded between two or more parties and are enforceable in accordance with legal requirements. They are not always concluded in writing. It happens that some entities conclude binding agreements on the basis of verbal arrangements or offers which do not meet the formal terms of the agreement (the so-called essentia negotii), e. g. accession to the performance of the agreement on the basis of the offer itself. The difference between normal contracts (e. g. insignificant contracts) and binding contracts is that the latter require a legal basis and legal capacity. As a result, a person with limited legal capacity will not be able to conclude a contract and therefore will only use ordinary contracts in legal transactions.

Full legal capacity as a obligatory element to enter into binding contract

Full legal capacity is a legal fiction accepted for the purposes of economic trading. It is assumed that people after reaching a certain age are mentally mature enough to be able to enter into a specific type of contract. Different national regulations adopt different age criteria. Nevertheless, other grounds for full legal capacity [1]:

  • Full mental capacity;
  • Non-restriction of legal capacity by a final court decision;
  • Awareness not excluded (temporarily excluding full legal capacity).

Considering the above, when concluding contracts we should not ask everyone to prove that they have full legal capacity. However, it is recommended that due care be exercised, inter alia, by: identify the person concerned and use appropriate suspicion (e. g. whether the person will certainly be able to fulfil the obligation or whether he or she has the appropriate authority to represent the legal person) [2].

Binding contracts and a economy

The conclusion of legally binding contracts has a huge impact on the economy of a region/state or globe. This is due to the fact that they provide adequate security for both parties. In the event of any litigation, they shall be the basis for determining the validity of the claims of either party. However, as set out in the previous paragraph, the contract must be concluded by persons with full legal capacity or appropriate authority to act. Otherwise, it may be challenged by the court or by the other party (in the event of a dispute) and will not have the desired effect.

Moreover, it is worth noting that thanks to the security of economic transactions, enterprises may apply less restrictive contractual penalties and banks may apply less security for credit lines granted to finance their business activities. This means that binding contracts play a very important role in the economy as they serve as security and guarantee of economic turnover.

Ultimately, it is important that binding contracts are not considered in absolute terms. Well, the issue of court proceedings and the enforcement of claims is very fluid and depends on the legislation of the country concerned. Always be prepared for a protracted procedure that will not necessarily allow you to quickly recover the relevant debts or repair the damage you have suffered [3]. In connection with the above, the basic disadvantage of binding contracts is noticeable. They are only a kind of abstract that is prepared to create a kind of shield that is not always 100% effective.



  1. T. Wilkinson-Ryan 2015, pp. 2113-2116
  2. D. A. Hoffman, Z. J. Eigen 2017, pp. 355-365
  3. L. A. DiMatteo 2013, pp. 1-35

Author: Weronika Brach