A memorandum of understanding (MOU) falls between a written contract and a handshake deal. It is a preliminary written agreement outlining the framework or key terms they will later include in a formal contract. An MOU is useful because it helps ensure all parties are on the same page. Generally speaking, the document is not legally binding. However, if its content resembles a contract, it may be legally binding and, therefore, enforceable. This article outlines the factors you should consider when dealing with an MOU.
When Should You Use an MOU?
An MOU is often used in commercial partnerships to establish mutual goals and expectations towards a specific project, initiative or transaction.
An MOU is often used in the following situations.
Navigating Complex Negotiations
An MOU is valuable when the parties are reluctant to form legal relations but still want something in writing to negotiate the final terms of an agreement.
Marking a Mutually Beneficial Partnership
Parties may use an MOU when considering a collaboration or commercial relationship as a way to define their roles, responsibilities and the objectives they aim to achieve together.
Outlining the Mutual Goals of a Commercial Partnership
An MOU can be used to lay the foundation for a joint venture. For example, you may use it to outline what each party will contribute to the partnership and be liable for.
What are the Contents of an MOU?
The specific contents of an MOU will be unique to each partnership and will ultimately depend on the nature of the agreement and the parties involved. Accordingly, it is helpful to keep in mind what you and the other party agree to and your mutual goals when drafting an MOU.
In addition to the basic details you will typically include in a standard agreement, such as the name and details of the parties, how long the agreement will be in effect and how the parties can terminate the agreement, an MOU may include:
- the purpose of the commercial partnership;
- the common goals of the parties;
- the roles and responsibilities of each party;
- any agreed-upon deadlines;
- any confidentiality obligations the parties would like to impose on the other; and
- how the parties will resolve disputes.
What are the Key Differences Between Contracts and MOUs?
Suppose you are deciding whether to enter an MOU or a formal contract. In that case, it is vital to understand the legal differences between the two types of documents and what rights you may have under each document. The table below outlines the key legal differences between a formal contract and an MOU.
| Contracts | MOUs |
| Terms are legally binding | Terms are not usually legally binding |
| Enforced by courts | Not usually enforced by courts |
| The parties intend to form legal relations | The parties do not intend to form legal relations |
| Must have an exchange of promises | Do not need an exchange of promises |
| Agreement is certain and complete | The agreement is certain and complete |
Intention
The intention to form legal relations is a key difference between contracts and MOUs. When entering a contract, the parties must intend to be legally bound by the terms.
On the other hand, when signing an MOU, you do not need to intend to be legally bound. Instead, your intention can be to clarify the mutual goals of your commercial partnership.
However, an MOU may be legally binding if it meets all the elements of a binding contract. Therefore, if you want to avoid uncertainty and clarify your intentions to enter into a non-legally binding MOU, including a clause explicitly stating this is a good idea.
To reduce uncertainty, you can insert a clause into the MOU to stipulate that you do not intend to be legally bound by the terms of the MOU. By doing so, a party to the MOU cannot enforce the document in court if the other party does not follow the terms of the agreement.
Purpose
The purpose of contracts is to create legally binding obligations and rights between parties. Therefore, courts can enforce contracts. Breaching the terms of a contract is likely to have legal consequences.
On the other hand, MOUs record agreements that are not necessarily legally binding. Parties use them to mark a commercial partnership rather than to create legal obligations. Specifically, MOUs may be used to define the goals and roles of parties in a commercial partnership. Generally, breaches do not have legal consequences, and it is up to the parties to resolve disputes.
Certain and Complete
A contract has to be a certain and complete agreement, whereas an MOU can still be in the negotiation process. The parties must agree on all key terms for a contract to be enforceable. On the other hand, parties often use MOUs when they are still negotiating aspects of their agreement.
For example, a supplier and a manufacturer may write an MOU to initiate a professional relationship, stating how they will work together to achieve mutual goals. However, they do not need to agree upon prices and the standard of products yet. Instead, they may later enter into a supplier contract that states the cost and specifications of the products in question.
On the other hand, as contracts are formal agreements that create legal obligations, they must have an agreed-upon exchange of promises. For example, in a supplier contract, the supplier promises supplies, and in return, the buyer promises money. However, if the buyer does not promise anything in return for the supplies, the contract is not enforceable.
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Key Takeaways
When initiating a business partnership, it is helpful to use a memorandum of understanding (MOU) to outline the framework of that partnership. While, in most cases, an MOU will not legally bind a party to the terms and conditions contained within the document, they are still a vital tool for businesses to help ensure all parties have the same expectations and are aware of their responsibilities. An MOU is unique to each partnership and typically outlines what the parties have negotiated, including common goals and responsibilities.
It is important to note that MOUs are not always legally binding. Therefore, if the relationship is precarious and much is at stake, a contract might be a more appropriate form to record the agreement.
If you need help with your MOU, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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