What is a Memorandum of Understanding?
The "M" in MOU really does stand for "Memorandum." It is one of many other turn of phrase in a string of gibberish sounding like an "legalese" decision, "Parole board of Maricopa County vs. Jacobs." or "Muxlow v Muxlow" or even "ATB v ATB." You know you’re in trouble when you don’t even bother to read the caption, because it’s a forgone conclusion the definition of the action, decision or policy will matter not one whit to your life. So, we Jump right in, shall we? The MOU or Memorandum of Understanding is a legally non-binding agreement with no real sense of formality to it, though it can certainly look formal.
An MOU is essentially an introductory agreement. An agreement to agree so to speak. It’s not intended to be a "final" declaration of an eventual contract. It is usually a document in which each side will declare their intent to commit to the idea as expressed within the MOU and it will be used basically to show that you intend to "work together."
An MOU is generally used when you are trying to get involved in something that’s still in the "works." If you are a real estate developer who wants to build, for example, a new housing development, a mall, or a resort, an MOU can be useful to you because it demonstrates that, within the view of the interested parties, you are well on your way to coming to an agreement. It might say, "Look, I am planning to develop a property," and "I am choosing to develop this property . You have demonstrated interest in collecting taxes, fees or royalties if I do this, therefore, let’s draw up an MOU to show everyone that we intend this relationship to move forward."
It might also say, "We will try to establish a mutually beneficial program to improve environmental awareness." Or even "I intend to apply for grants relating to [insert subject] if you share your resources with me." Put another way, an MOU declares an intent to work together, and it’s often used in the very beginning stages of negotiations and terms. From there, it might evolve into a Memorandum of Agreement which would declare what you are agreeing to, assuming all the preconditions of the MOU have been met.
A letter of intent is technically a type of MOU though the two terms are often used interchangeably. The difference would be that an MOU is generally far more informal and seems to have less "legalese" in it.
An MOU can sometimes act as a placeholder while certain decisions are made. Before the MOU is signed, both parties have the option of changing their minds and deciding not to go through with the deal.
An MOU helps provide an outline of what both parties intend to do. It also offers some documentation of the intent and provides an outline of where you’re going on the project.
Unlike a contract there’s no passage of money, change of title, or anything specific that would occur in the absence of agreement.
What is a Legal Agreement?
A legal agreement is a type of contractual agreement (typically in writing) which is enforceable by a court of law. In common parlance a legal agreement relates to all types of written agreements which are binding on the parties. A typical example of a legal agreement is a sales contract or an employment contract.
A legal agreement must address at least 4 specific terms as required for it to be enforceable (i.e. legally binding). These four terms are: 1) Identification of the parties, 2) Description of the subject matter, 3) Time for performance (i.e. time of delivery, etc.), and 4) Price.
Therefore the "formal" definition of a legal agreement is as follows: An agreement which is enforceable by a court of law because it contains the four elements of an enforceable contract is a legal agreement.
Key Distinctions Between an MOU and Agreement
The key differences between MOU and Agreement: Enforceability, Intent, and Legal Standing
MOU and Agreement are not subject to the same legal requirements for validity and thus can have different implications for the parties. The primary differences between the memorandum of understanding and agreement for practical purposes are set forth below: Enforceability: an offer that has been accepted by a party creates a binding contract which can be enforced in a court of law. However, if an MOU is still under negotiation and has yet to be signed it may not constitute an enforceable contract as it is really just a non-binding agreement which, if implemented in the future, may be enforceable. Intent: usually an MOU is signed with the intention not to create a legally enforceable contract. An MOU is normally considered a letter of intent or term sheet and generally viewed as a document that’s non-binding on the parties. However, if the parties intended that the MOU is binding at law then for all intents and purposes the MOU takes the form of a legally enforceable contract. Legal Standing: courts treat an MOU as a less formal document giving merely the intention of the parties to be bound rather than an enforceable contract. However, an agreement drawn up in the form of an MOU may well be regarded by the court as a binding contract. Still, as noted above the mere signing of an MOU does not make it binding as it is really just an offer to be legally bound in the future subject to the other party signing it.
Legal Risks Associated with MOUs
The signing of an MOU has legal implications. As stated above, typically a signed MOU does not create an enforceable contract because it lacks all of the essential elements of a contract. Negotiations between the parties often occur over the course of months or even years. A party may argue in a state court that an MOU does create a contract, because it contains most of the elements of a valid contract, and the parties intended to be bound by it. A judge will take into consideration the entire context of the negotiation, and the intent of the parties.
An MOU is a unique type of contract with a wide variety of methods for drafting it. The important concept is that all provisions must be clearly set forth in writing, otherwise the judge may throw out a party’s claims. A judge will consider legal principles as well as parole evidence when interpreting an MOU.
In the recent case, Bolder and Boulder Town Center v. USR, a judge found no enforceable contract existed. Many provisions were agreed to in a letter of intent, but contract details were never finalized. The signing of the MOU showed that the parties intended to be legally bound by the terms of the contract. However, the plaintiff provided a "context" for the circumstances surrounding the case so that the judge would consider parole evidence. The circumstances did not support the existence of a contract, nor did the judge find any grounds for pierce the corporate veil.
When to Use an MOU Versus an Agreement
Legally binding agreements can be an absolute nightmare, especially in the case where one party didn’t understand what they were signing, or both parties didn’t read it before signing. There are many scenarios where a less formal approach is best, and that’s when it’s good to know the difference between an MOU (memorandum of understanding) and an agreement. The way to think of an MOU as more of a conversation and an agreement as more of a contract.
While there are certainly times when a binding agreement is preferable, such as when one party is investing millions into something, or when that one party needs to control the direction of the business plan to protect their interests, there are many times when an MOU is more appropriate. Here are some examples of the former:
A group of start-ups come up with the concept for a shared marketing platform, and they want to get it off the ground as soon as possible. They know they will need to raise funds, but they’ve put a plan in place to build a business, and they have everything under control. In this case, because they have a plan for getting funding and building the infrastructure they will need to support their network, or at the very least they’ve identified the people who will bring that plan to fruition, they already know what direction they’re going in, and they need to write a binding agreement now to protect themselves.
A technology-driven real estate platform requires several vendors to work together in order for them to create the product they envision. The developers need to pull together the best available APIs so that the product can offer the benefits they want to provide. They’ve put together a plan to make this happen, and have even gotten a commitment from these vendors to participate, pending the vetting process. They now need written agreements to establish the relationship.
On the other hand, MOU’s can be used in the following situations:
Investors want to get together to explore the logistics of turning their vision of a food co-op into reality. What do they need to consider? How about the availability, seasonality, pricing and typical varieties of food items, plus pricing and pattern of referrals , and perhaps even volume. These are just a few issues they would need to address in order to move forward, as there are many variables to consider when creating food-co-ops of any kind. They need something in writing, and an MOU is a good way to start.
A group of artists wants to collaborate on a social media project. They don’t know each other, they don’t know how it will work, they don’t know how long it will run, what will happen when/if it ends, who will drive each part of the project, etc. What they have is a good idea that they want to flesh out before they proceed. An MOU is an ideal short-term solution.
The difference between MSAs and MOUs is typically that MSAs are longer-term, covering multiple initiatives over several years, while MOUs are shorter-term, covering specific initiatives over the short-term. Moreover, when you’re writing a master agreement, you’re developing more of a framework, i.e., terms that shape the relationship we’re discussing. For instance, it might outline your business relationship with this supplier—maybe you will work together on a specified project (or projects), but also consider future opportunities or agreements.
The MOU, on the other hand, is like the movie trailer for the actual contract. It’s a quick peek at what’s to come in the full version. Its purpose is to establish a framework for taking the next step, which is typically drafting the agreement. An MOU is a high-level look at the agreement to help both parties see if they’re on the same page before they start drafting the details.
So there you have it. MOUs are great for when two parties want to hash things out, see if they understand each other, and then go about deciding whether to move ahead with a business relationship and a binding agreement. But they’re also sometimes used when the terms of an agreement are expected or needed to change over time, and the parties want a way to document the relationship.
It is important to note that once parties decide to move ahead with an agreement, the MOU is usually referred to as a letter of intent (letter of intent) or a term sheet. Those terms are often used to describe documents that establish the principles between parties when a contract or agreement is being negotiated.
How to Prepare MOUs and Agreements
The drafting of agreements and MOUs is a serious matter. The drafting party must take care to ensure that the execution of the agreement is appropriate and that the conditions set forth are met; this means including all necessary clauses in each agreement or MOU that will protect the parties.
As an overview, MOUs usually contain fewer clauses than formal agreements. Regarding MOUs, many businesses overlook basic protections such as confidentiality. Further, because they are oftentimes not supported by some legal authorities, the drafting party should take care to ensure the appropriateness of execution. For example, a school use MOU that provides for the use of public property, such as a gym, without appropriate approvals may be deemed void due to the lack of jurisdiction by the parties to execute the MOU.
Formal agreements require more specific clauses to ensure protection. For example, a do’s and don’ts list will help to ensure that the body executing the agreement has the appropriate authority. One common error is in the identification of the party. Make sure that the appropriate party is identified to the agreement, for example, if one private company is merging with another private company, the party to the agreement should be the merging company and not the two original private companies.
If federal laws require specific provisions to be included in your agreement (objectives and goals; activities and benefits; activities available to the public), you must include them. You should also consider including the following clauses in agreements:
Amendment. This clause will help you to avoid the problem of having to renegotiate the entire agreement when minor changes are required.
Funding. This clause can limit or expand the funding available to a project.
Intellectual Property. Ensure that the IP clause protects your intellectual property, otherwise it can lead to an unwieldy situation whereby, on the original agreement, one party may own all rights to the information, and then from the initial grant, the ownership can cascade until the information is no longer owned by any party.
Nonexclusive. This clause enables you to retain the right to enter into other agreements with other parties.
Open Records. This clause will help you understand the additional obligations you will encounter, such as unintentional disclosure of private information.
Ownership and Assignment. This clause can include the ability to assign the contract to another appropriate party.
Limitation of Liability. This clause can limit the extent of liability if there is negligence or breach of contract.
Standard of Care. This clause will ensure that the level of care of the parties is defined, based upon industry standards.
Survival. This clause will ensure that relevant obligations continue.
Wrapping Up
The difference between MOU and Agreement has been discussed in the article above. So, what is the right document for your business? Should it be a Memorandum of Understanding or an Agreement? The answer most often is on the fact that MOU is non-binding while an Agreement is a binding contract.
Therefore, if you are conducting business with anyone, it is suggested to have an Agreement which is always signed. The following are some of the suggestions which would be applicable when choosing between MOU and an Agreement:
- If there is a business endevour which is clear and straightforward , an Agreement is sufficient.
- If there is a situation where there is an initial phase of a business relationship, MOU is the preferred choice.
- MOU is typically a wish list where as Agreement would contain mutual obligations.
- MOU is less formal and can be used to test the waters. Agreement is a serious document which binds all parties.
- MOU can be used to agree on the 1st steps to reach an agreement but Agreement encompasses more rights including rights of termination.
- MOU is not a legally binding while Agreement is a piece of legal document with a legal force.