The difference between a Memorandum of Understanding (MOU), a Memorandum of Agreement (MOA) and a contract is that only contracts legally bind parties to an agreement. Both memorandums can be used as preliminary steps before creating a contract; however, they are not legally binding as they may not contain legally binding terms.
Memorandum of Understanding
An MOU is a document that defines general concepts, including common goals and frameworks agreed upon by both parties to ensure that they are on the same page. It can include general terms of the arrangement, including price, timeframes, dispute resolution, and subject matter. MOU’s tend to have a clause stating that the document is not intended to be legally binding. MOU’s are generally used to determine whether the parties are on the same page rather than ensuring that a specific task is to be completed.
Memorandum of Agreement
An MOA is a detailed business document that outlines an agreed objective between parties. MOA’s are created before a more detailed contract to allow the parties to have mutual understanding and standard terms. Businesses or organisations may also use MOA’s to indicate goodwill between the parties and record what they have agreed on. The contents of an MOA can include details of specific responsibilities and actions taken by both parties to complete the agreed objective.
A contract is a legally enforceable agreement. It can be either written or verbal. Contracts generally involve an exchange of value, such as goods or services. Four essential elements are required to establish the existence of a contract; including:
- An offer
- Acceptance of that offer
- Intention to create a legal relationship
- Consideration; a promise of sufficient value to do or refrain from an activity.
A contract is best used when there is a reliance on the other party to perform a specific obligation. Contracts are the best document to protect your business interests as parties understand responsibilities are enforceable, and there is clarity around dispute resolution mechanisms.
The Courts will determine whether a contract has existed from the elements provided above. If an MOA has the features of a contract, such as a promise to exchange value, the Courts may determine that the MOA is legally binding and may decide to enforce the agreement.
The drafting of an MOA and a contract can be critical to the success of a transaction, or the business as a whole. If you require assistance with any aspect of commercial law, contact our contract lawyers via the contact form or call 1300 337 997.