What is a Memorandum of Understanding?

A memorandum of understanding (MOU) falls somewhere 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. A MOU is a useful tool because it helps ensure all parties are on the same page. Generally speaking, the document is not legally binding. However, if its content resembles that of a contract, it may be legally binding and therefore enforceable. This article sets out the considerations you should take into account when dealing with a MOU.

When Should You Use a MOU?

A MOU is often used in commercial partnerships to establish mutual goals and expectations. It sets out the rights and obligations of each party, which they incorporate into a formal contract at a later date.

You may want to use a MOU, especially when you:

• do not want to form legal relations;
• want to mark a mutually beneficial partnership; or
• want to outline the mutual goals of a commercial partnership.

What is the Contents of a MOU?

Each MOU is unique. When drafting one, it is useful to keep in mind what you and the other party have agreed to and what your mutual goals are.

A MOU may include:

• the purpose of the commercial partnership;
• the common goals of the parties;
• the roles of each party;
• any agreed upon deadlines; and
• how the parties will resolve disputes.

What Are the Key Differences Between Contracts and MOUs?

Intention

Intention to form legal relations is a key difference between contracts and MOUs. When entering a contract, the parties have an intention to be legally bound by the terms.

However, when signing a MOU, you do not need to intend to be legally bound. Instead, your intention can be to clarify what the mutual goals of your commercial partnership are. It is a good idea to include a clause explicitly stating that you do not intend to be legally bound by the terms of the MOU.

Purpose

The purpose of contracts is to create legally binding obligations and rights between parties. Therefore, courts can enforce contracts and breaches 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 a MOU can still be in the negotiation process. For a contract to be enforceable, the parties must have reached an agreement on all key terms. 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 partnership, stating how they will work together to achieve mutual goals. They do not need to have agreed upon prices and the standard of products yet. They may later enter into a supplier contract that states the cost and specifications of the products in question.

Because 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. If the buyer does not promise anything in return for the supplies, the contract is not enforceable. MOUs do not have such set guidelines. As a result, you can include whatever you deem necessary in your MOU.

Key Takeaways

When initiating a business partnership, it is useful to use an MOU to outline the framework of that partnership. Using an MOU will help ensure all parties have the same expectations and are aware of their responsibilities. It outlines what the parties have negotiated, including common goals and responsibilities. They are not always legally binding. Therefore, if the relationship is of high risk and a lot is at stake, a contract might be a more appropriate form to record the agreement. If you have any questions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.