A binding contract is a written agreement between two individuals or entities that will be enforced by the power of the law. The contract is thus considered binding because if one party fails to live up to his obligations as set forth in the document, the court will impose penalties. Some refer to a contract as the creation of a private legal duty, because two parties create a legally enforceable exchange of promises.
In order for a contract to be binding, it must be made in accordance with the contract law of the relevant jurisdiction. The exact rules for what is required to create a binding contract differ from state to state, country to country, and situation to situation. For example, in the United States, certain types of contracts must be in writing, such as contracts for the sale of goods of more than $500 US Dollars (USD, while other contracts do not need to be in written form to be enforced.
The contract is considered binding because there are penalties for not fulfilling the obligations set forth within the document. If one party fails to do what he promised in a legally valid, enforceable contract, the other party can take him to court and sue him for breach. If the party suing establishes that the contract was valid and that failure did in fact occur, the court will find for the plaintiff and award damages.
The most common type of damages for breaking a binding contract are monetary. The plaintiff is paid the amount of financial loss he suffered as a result of the breach. The losses must be actual or provable, and the plaintiff has the obligation to try to mitigate, or minimize, the financial losses he incurs as a result of the breach.
Other damages for breach of a binding contract do exist, however. In some cases, the court will command specific performance. This means the defendant who breached the contract will be legally compelled by the court to fulfill his part of the bargain. This occurs in situations where financial damages could not quite make the plaintiff whole, or put him back into the situation he would have been in if the breach had not occurred, such as if the contract was for the sale of an extremely rare item.
When a person signs this type of contract, he thus needs to be aware that he must do what the contract says. Ignorance of the contents of the contract is no defense, because the law imposes a duty to read. This means if a binding contract is signed, and no valid legal defenses exist — such as material fraud in the creation of the contract or mutual mistake — the parties must carry out their promises under penalty of the law.