Binding
Agreements

DEFINITION

An arrangement to do something, or refrain from doing something, that possesses enforceability. More commonly referred to as a contract.

CONTRACT FORMATION REQUIREMENTS

Because a contract is binding, the law sets a high standard for its formation.

A contract requires six elements: (i) offer (a party makes a proposal to another party); (ii) acceptance (the other party accepts the offer); (iii) awareness (each party is aware it is entering into a legally binding agreement); (iv) consideration (each party is exchanging something valuable); (v) capacity (each party is capable of entering into the contract); and (vi) legality (the agreement is not prohibited by law).

If any one of these elements fail, the agreed-upon terms will likely lack enforceability. Although there are methods to seek remedies even where a contract fails, it is best not to rely on them in commercial practice.

BINDING AGREEMENTS IN M&A

Other than for the portions of letters of intent, indications of interest, and process letters that are not binding, most all other agreements in mergers and acquisitions are binding—as long as they are correctly drafted and finalized.

Other types of non-binding agreements may exist in ordinary course business and commercial operations and, where they do, their non-binding nature should be re-evaluated on a routine basis.

PITFALLS

The following contract issues frequently arise when parties intend to enter into binding agreements:

• NOT REDUCING TO WRITING

It is possible for parties to enter into binding agreements that are oral, but some contracts—like those governed by the Statute of Frauds—generally must be in writing to be enforced.

For example, in California, contracts that cannot be performed within one year and certain debt instruments, among others, must be written.

Even if the six elements of contract formation referenced above exist, there may be a requisite seventh element (i.e., a writing) depending on the circumstances.

• LACK OF CLARITY AROUND RECITALS

Recitals to contracts (also known as the “whereas” clauses) often precede the part of a contract describing the legally binding agreement. If the recitals contain material deal or other terms, the contract should be clear that the recitals are part of the legally binding obligations. Otherwise, an ambiguity could exist and form the basis of a dispute.

• MISSING SIGNATURES

A party who does not sign a written agreement generally will not be bound by it. There are nuanced exceptions, including for course of conduct and performance, but it is inadvisable to rely on them. It is essential to collect all signatures to an agreement.

• UNINTENDED CONTRACT FORMATION

Contracts do not necessarily need to be in the form of formal written agreements drafted by lawyers. Informal email exchanges, text messages, oral commitments—even agreements scribbled on napkins—can be legally binding.

• UNAUTHORIZED BUT ENFORCEABLE

If a contract has not been properly authorized by a company (e.g., a junior employee or an AI bot signs it), it still may bind the company vis-à-vis the counterparty. It is therefore important for companies to have clear operating procedures around contract approval and signing authority.