The clash is always resolved by the context of the word's use, but you need to be aware of the two meanings. A variable is free within a function if the function provides no binding form for the variable's name. Lisp creates a closure that captures the bindings of free variables for the function. Variables that are free within a function really do have bindings, but the bindings are outside of the function definition. When Lisp executes the function, it finds free variables in the closure.
Closures are important because they let a function capture and retain lexical bindings.
Take another look at the example above. But because the function had a closure for that variable, it still has access to its binding. We created a binding for the variable E and gave it an initial value of 1. Since both functions' free variable E is closed over the same binding, they must retrieve the same value. However, some Lisp iteration forms bind their iteration variables just once, then assign new values on subsequent iterations.