A spellbinding is a special item (similar to an inscription but also different) it can be crafted using the Bewitching skill (although any player can fit a spellbinding into an item - the skill is only required to make the spellbinding but not to use it).
A spellbinding contains a magic spell that when installed into an item of armor or clothing will place that magic spell on that item, for example Spellbound: Health I when fitted will add a spell to the item that will cast +10 health on the person that equips the item.
Automatic item spell activation was added to the game in November 2008 to accomodate this system.
You can have a Spellbinding and a Patch/Bejewel in the same item!
The Bewitching skill comes from the Witch class obtainable via the Afterlife expansion pack.