Is an MOU Legally Binding?

Jan 13, 2017 | Commercial Contracts, Start Up

The short answer

Generally ‘no’, but it all depends on the wording in the Memorandum of Understanding (MOU), as sometimes they can be legally binding.

Sorry we don’t like giving ½ answers but in this case, given how many MOUs we have seen, 70-80% of them were nonbinding, the rest were legally binding.

An MOU, is a document that two or more organisations such as companies, government departments or not-for-profit organisations, create when they want to work together. It is a goodwill document that sets out a common vision and the intentions of the parties. It may include a statement that the parties intend to form a contract at a later date, however it will usually include a clause that says something like ‘nothing within the document is legally binding’ – meaning it is not a legally binding contract.

The longer answer

Sometimes MOUs are not actually MOUs, but legally binding contracts instead. This is because what the document says is more important than what it is called. The old adage, “if it look like a duck, swims like a duck and quacks like a duck, then it probably is a duck” applies in this situation.

So, if a document is called a Memorandum of Understanding but it says things like “x agrees to do y” or “x shall do y” then it may well be a contract because it is putting obligations on the parties, and this could be the case (i.e. it could be a valid contract) even if the MOU purports to be nonbinding! Getting interesting isn’t it?!

Is the MOU a contract?

In order for a MOU to be a contract, it needs to meet all the requirements of a contract. Some of the factors a court considers when deciding if an MOU is a contract are:

  1. Whether the parties intended to create a legal relationship. This is determined by the objective circumstances of the situation, i.e. whether an outside person looking at the transaction would think that the two parties wanted to be legally bound. It doesn’t matter what the two parties actually thought. It just matters what they did and how they acted.
  2. Whether consideration was exchanged. What is each party getting out of the contract? Getting money for a service is a common example of an exchange of consideration. If there has been consideration exchanged under the MOU then you are part the way down the road to actually having a contract (and not a nonbinding MOU).
  3. Whether the terms of the MOU are clear and certain enough to be legally binding. This means they can’t be vague and aspirational, they need to be specific. You can’t be bound by something if you don’t know exactly what it is you have agreed to!

Is the whole MOU binding or just some of it?

Whether the whole MOU is legally binding or just some of it depends on the wording of the MOU. If two organisations sit down and hammer out all the terms of an agreement including obligations on both parties, sign it and intend for those terms to be enforceable, then it is likely that the whole MOU is actually just a contract that’s been given another name. This type of situation can happen where two parties intend to form a contractual relationship, but they want a lawyer to write up the agreement in the proper legal language first. They may not realise that what they have agreed to already is legally binding, even if they never get around to getting a lawyer to write it up properly.

It is also possible that some of the terms in the MOU are legally binding, but not all of it. A common way that this happens is when two parties agree that they want to form a contract at a later date with a clause such as “X and Y agree to form a contract on Z date”. In this situation the content of the MOU is not legally binding, but the parties are bound to create a contract.

How do I make sure my MOU is not legally binding?

It is important the MOU does not have obligatory statements such as “x agrees to do y” or “x shall do y”. Use a statement like “x may do y” instead. The MOU should also have a disclaimer statement such as “the parties do not intend for this MOU to be legally binding”. But even this statement does not guarantee that that the MOU won’t be legally binding. You can see how tricky these things can get! If you’re unsure about whether your MOU is legally binding, it is a good idea to get a lawyer to have a look over it for you before you sign it.

If you need help drafting or reviewing an MOU, please get in touch!

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