What is a Memorandum of Understanding (MOU) and when to have one?
A Memorandum of Understanding (MOU), sometimes referred to as a Memorandum of Agreement (MOA), is often confused with a contract. However, there are key distinctions between an MOA and a contract, most importantly, whether or not legal obligations are created. Mixing these up can cause issues later on, with the potential of creating legally binding obligations or being unable to rely on a party to perform their side of the deal.
What is a Memorandum of Understanding?
An MOU is a formal agreement between two or more parties, setting out the expectations and responsibilities of each for a mutual benefit. Unlike a contract, an MOU is not legally binding, the details of the agreement may still be up for negotiation and there is not an intention to create legal relations between the parties.
Why have an MOU if you can’t enforce it?
Although an MOU is generally not enforceable, it formalises the commercial partnership and clearly sets out the roles of the parties and the purpose of the partnership. An MOU makes sure everyone is on the same page. It also gives a level of seriousness and mutual respect to the partnership without creating the legal obligations of a contract. In saying that, an MOU will often lead to a contract down the line, and so has been colloquially called ‘an agreement to agree’.
However, be careful with the terms of your MOU! If the substance of the agreement resembles a contract (i.e. details the specifics of a project, details the exchange of money) it may be enforced by the courts. It is worth including a clause stating the parties do not intend to be legally bound.
What should be included in a MOU?
While contracts have specific requirements, there are no set rules for what to include in your MOU. In general, you may want to include:
- Details about the parties
- Purpose and goals of the partnership/arrangement
- Roles, responsibilities and obligations of each party
- Strategies for dealing with foreseeable issues
- An initial point of contact for each party
- The start and end date of the MOU (and a method to extend it if necessary)
- A dispute resolution plan
- A clause stating the MOU is not intended to be legally binding
When to have an MOU?
An MOU can be a useful tool when you are commencing a commercial partnership, as it allows you to ‘try without buying’ so to speak and see if you work well with the other party. It is also a good idea if you are still negotiating the details of an arrangement but want to formalise the general objectives and benefits of the partnership.
Ask yourself if you need to rely on the other party performing certain tasks or if you could suffer financial or reputational damage if the other party does not pull through? If your answer is ‘yes’, then an MOU is not appropriate and you may need a contract.
If you need assistance with an MOU or you’re unsure about the best way to document your commercial arrangements, get in touch with us via the contact form or by calling 1300 337 997.