Entrepreneurs are increasingly using MoUs as a way to outline how they will work in partnership. But what are MoUs? When would you use an MoU and when would you use a legal contract?
This How-to guide has been written to help you understand what an MoU is and when you would use one.
Here’s a guide to knowing what you need to know about MoUs.
First, make sure you understand what an MoU is:
An MoU is a formal agreement between two or more parties, typically made by governmental organisations, non-governmental organisations and, to a lesser extent, corporate entities.
An MoU can be thought of as ‘an agreement to agree’ – they are designed to broadly outline an agreement. MoUs give a flexible framework for parties to work together. They are not binding contracts.
Decide whether an MoU is suitable for your needs:
Before writing your MoU, decide whether an MoU is the right option for your circumstances.
An MoU is suitable when:
- you want to share information and manage obligations with another party to achieve a common objective
- the specialist knowledge of all parties is required to achieve an outcome, but parties do not wish to be bound by formal contractual terms
- formal contractual agreements are prohibited, such as between government organisations.
An MoU is not a ‘binding document’, that is, it is not written to create an enforceable legal contract (unless you deliberately make it so – see step 3). But as a formal document, MoUs are often described as a ‘meeting of the minds’ between parties. MoUs help parties have a shared understanding of their agreement, and what their obligations are relative to each other.
The formality of an MoU allows it to show this understanding where less formal arrangements, such as verbal agreements, cannot.
A common role of MoUs is as a ‘pre-contract’ agreement, in which the arrangements to date are recorded and become subject to the future conclusion of a contract.
An MoU is not suitable:
- While MoUs are a formal document, they are not the best option if you are after enforceable legal obligations.
- The non-binding nature of MoUs also makes them ineffective in regulating the exchange of money. While payment methods can be proposed in an MoU, you must not rely on an MoU regarding the actual payment for actions completed.
Be clear about whether you want any parts of your branding
Although an MoU as a whole document is generally not legally binding, specific provisions can be made binding. For any provision in the MoU to have legal force, the MoU has to expressly state that this is the will of the parties who have signed it.
An MoU cannot be binding if:
- it specifically states that there is no intention to create legally binding relations.
- It says a contract is to be concluded at a later time. Because this states that there is intent to create a legally binding document at a later date, an MoU written before that contract cannot be legally binding.
- the terms of operation are unclear. This includes where there is a need for further negotiations, or where the roles of the parties in achieving the outcomes is ambiguous
- it is not signed by all parties.
Even though MoUs in themselves are designed to be broad, non-binding agreements there are instances in which an MoU as a whole can become legally binding – even if you didn’t intend it to.
So if you are drafting an MoU with the intention for the agreement to be non-binding, it is important to know the ways in which an MoU can unintentionally become binding.
You could accidentally give your MoU legal force, which risks making it binding. This would happen if you used terms in your MoU that had too much legal value. The legal value is determined by the terms themselves, not by the kind of agreement you have created.
Now write MoU (a rough guide)
This guide aims to give your MoU clarity of communication and structure, while still allowing flexibility to suit the needs of unique agreements.
Giving your MoU an organised structure helps you clearly represent the will of the parties, and communicate your agreement effectively. The guide can also help you avoid unintentionally making your MoU legally binding. As a general guide, an MoU should explain:
- what organisations are involved
- when the agreement starts
- the context to the agreement and the reason for it
- the values and principles of the agreement
- the key people involved
- the expected outcomes
- who will do what (in general terms)
- the terms of agreement
Lastly, your MoU should provide space for signatures.