Memorandum of Understanding

What is a Memorandum of Understanding?

A Memorandum of Understanding or MOU is for use between two or more parties that are interested in working together on a particular project. It is intended as a starting point for the parties, as it enables them to set out the preliminary understanding between one another, and can help them to work towards a more formal agreement.

What is the difference between a Memorandum of Understanding and a formal contract or agreement?

An MOU is intended to be the first step for parties. They may sign the MOU, and then go and work on a formal contract that sets out the terms of their agreement in more detail.

An MOU is designed to not be legally binding, meaning that the parties may not actually be legally obliged to comply with it. This is because in many cases, parties may not actually be certain about the specific terms which they can agree to, but they still find it beneficial to put something in writing, outlining some broader goals (such as the general nature of the project), and confirming that they will act in good faith in pursuit of those goals. Often, parties may sign an MOU outlining some general agreement, and then will go away and make some further investigations before working out the finer details. Although a Party may not be legally bound by this MOU, many parties feel compelled to comply with it anyway - firstly, because the MOU does actually describe what they intend to do, and secondly because they are wary that a failure to comply can harm their professional reputation and their ongoing relationships.

On the other hand, a formal contract is usually intended to be legally binding, so there can be penalties if one of the parties does not comply with it.

Is it mandatory to have a Memorandum of Understanding?

No, the parties can go straight ahead and prepare a formal contract if they prefer. However, many parties find it useful to prepare an MOU first. For example, they might prepare an MOU and then give it to their lawyer, so that their lawyer can use the information to prepare a formal contract.

Parties that are involved in complex negotiations where there are a lot of moving parts (for example, in relation to a business sale) often find an MOU particularly helpful.

Who is involved in a Memorandum of Understanding?

Usually, the parties that are intending to sign a formal contract will also be the ones who sign the MOU. However, in some cases it might be a related Party. For example, in the case of a business sale, the proposed buyer and seller of the business might sign the MOU. But then before the final contract is prepared, the buyer might go and create a new company which will be the Party that actually signs the formal business sale contract once it is ready.

What has to be done once a Memorandum of Understanding is ready?

Once the MOU is ready, it should be signed by both parties and dated. Both parties should keep a copy for their own records. If a formal contract is being prepared subsequently, then the MOU can be provided to whoever is preparing the formal contract.

The Memorandum may then be used as a point of reference to guide the negotiations as the parties move forward towards a final agreement. If a legally binding contract is required, consider some of our other available templates, including:

• Business Sale Agreement
• Loan Agreement
• Partnership Agreement
• Service Agreement
• Equipment Rental Agreement
• Contract for Sale of Goods
• Vehicle Sale Agreement
• Employment Agreement
• Remote Work Agreement
• Joint Venture Agreement
• Intellectual Property Licence Agreement
• Intellectual Property Assignment Agreement
• Agent Agreement
• DJ Agreement

Which documents should be attached to a Memorandum of Understanding?

There are no documents that absolutely must be attached to an MOU. However, depending on what the parties are proposing to do together, there are a number of documents that could be attached. For example:

• Confidentiality Agreement or NDA - if the parties are planning to share sensitive information with each other and want to make sure it is protected.
• Non-Compete Agreement - if the parties want to make sure that the other Party doesn't take whatever they learn via the MOU and use it to develop a competing business.
• Property identification documents such as title documents and floor plans - if the MOU relates to real estate or business premises.
• Relevant business documents such as licences, permits, registrations, or lists of assets - if the MOU relates to a business sale or other similar transaction.
• Any other relevant documents.

Is a Memorandum of Understanding binding?

Usually, an MOU is not legally binding. However, as with any legal matter, this can vary depending on the circumstances. In some cases, MOUs have been found to be legally binding. We cannot confirm whether or not your MOU is legally binding. If you need to be sure about this, then you should seek legal advice.

There are various factors which will help to clarify whether or not an MOU is legally binding, such as:

• Do the parties intend to be legally bound? Many MOUs that are not intended to be legally binding, will include some words to this effect. For example, they might include a clause which says "This Memorandum is not intended to be legally binding". Obviously, this sort of wording is a clear indication that the parties do not intend it to be legally binding. However, aside from this, a court would look at the entire circumstances of the matter, to determine whether the parties actually intended to be held legally accountable for what was said in the MOU.
• Is the MOU a complete agreement? An MOU is more likely to be binding if it contains a complete outline of the essential terms of the agreement between the parties. If it only includes some of the terms of the agreement, with further details to be clarified at a later date, then it is less likely to be legally binding.
• Is the MOU a final agreement? If the MOU indicates that the parties have not yet come to a final agreement, then a court may find that it is not legally binding.
• Did both parties promise something? For example, in the case of a contract for a landscaping project, one party promises to perform some landscaping work, in exchange for a sum of money. The other party promises to provide the sum of money, in exchange for the landscaping work. If this sort of exchange of promises has occurred, then this can indicate that the MOU is intended to be legally binding. However, many MOUs do not actually contain this sort of exchange of promises. Instead they set out what the parties "might" do or what they aspire to do.

What must a Memorandum of Understanding contain?

An MOU should contain:

• The full name and contact details of both parties.
• If either party is a business, the name of any person within the organisation that will be dealing with the MOU and/or the formal contract.
• A description of the project that is being proposed.
• The name of the formal contract that is being proposed.
• The proposed terms of the formal contract.
• Any other relevant/important information, such as key dates or confidentiality obligations.

Which laws are applicable to a Memorandum of Understanding?

As the Memorandum is not legally binding, there is no law that directly applies to it.

However, ordinary principles of contract law, as provided by the common law, may be applied in interpreting and understanding the agreement between the parties.

In the event that a Party acts in bad faith, causing another Party to suffer loss, then general principles of equity, estoppel, or laws dealing with misleading and deceptive conduct may become relevant.

How to modify the template?

You fill out a form. The document is created before your eyes as you respond to the questions.

At the end, you receive it in Word and PDF formats. You can modify it and reuse it.