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If you’re collaborating with another business or organisation, you might have heard people mention a “Memorandum of Understanding”, commonly shortened to MOU. You may be wondering: What exactly is an MOU? How does it differ from a contract? And do you need one in your business dealings?
MOUs can offer clarity and set a strong foundation for partnerships – but there are also some common pitfalls and misconceptions to watch out for. In this article, we’ll break down what a memorandum of understanding is, why (and when) you might need one, and how to write an MOU that safeguards your interests. We’ll also explain where an MOU sits in relation to other agreements, like contracts, and answer FAQs such as what’s usually included and how MOUs are used in Australia.
Whether you’re planning a joint venture, entering into a collaboration, or simply want to explore opportunities with another party, understanding MOUs will help you set clear expectations and avoid legal headaches down the track. Let’s dive in.
What Is a Memorandum of Understanding (MOU)?
A Memorandum of Understanding (MOU), sometimes called a “memo of understanding”, is a document that outlines the general intentions and principles of an agreement between two (or more) parties. Think of it as a formal handshake on paper – it shows that both sides are on the same page and wish to work together in a particular way, without necessarily creating a legally binding contract (at least, in most cases).
You might also see the term “MOU agreement” or “MOU contract” used, but it’s important to know that, in practice, MOUs are generally different from legally enforceable contracts. They set out mutual goals, proposed actions, and shared understandings, but don’t always create enforceable obligations. However, the exact nature and legal effect of an MOU can depend on how it’s drafted – and what’s intended by the parties involved.
What Does MOU Mean in Business?
In business, an MOU is often used when two organisations or companies want to outline the basis of a potential partnership or collaboration, but are not yet ready (or able) to enter into a binding contract. This could be for reasons such as ongoing negotiations, a desire to formalise discussions before moving forward, or the need for a “trial” phase to test the relationship.
Common business scenarios where you might use an MOU include:
- Discussing a joint venture or partnership
- Entering into a collaboration on a project (for example, an event or campaign)
- Setting out shared commitments to seek funding or submit tenders together
- Agreeing on a “test run” or pilot scheme before committing to a full contract
MOUs are popular in both the commercial and not-for-profit sectors. They’re sometimes used by government bodies and community organisations as well.
How Does a Memorandum of Understanding Differ From a Contract?
The biggest point of confusion around MOUs is whether they are enforceable contracts. In Australia, the answer depends on intention: was the document created with the intention to create legally binding obligations, or was it simply intended as a summary of understanding?
In most cases, an MOU is not a legally binding contract. A contract requires these elements: an offer, acceptance, consideration (something of value exchanged), certainty and, crucially, an intention to create legal relations. While MOUs might include terms similar to a contract, they often lack consideration or an intention to be legally binding.
However, it’s possible for an MOU to become legally binding – either as a whole or for select clauses (for example, confidentiality or exclusivity). If you don’t want your MOU to be binding, it’s important to say so clearly in the document. Otherwise, a court could potentially find it enforceable in the event of a dispute.
This is why it’s wise to speak with a legal expert about your specific objectives before drafting or signing an MOU. For more detail, check out our article MOU vs Contract – What’s the Difference?
What Does a Memorandum of Understanding Between Two Parties Look Like?
A typical memorandum of understanding between two parties for business will:
- Name the parties (company names and ABNs, if relevant)
- Explain the background or purpose of the arrangement
- Outline proposed roles, responsibilities and actions for each party
- Set out the intended timelines and milestones
- Often include provisions around confidentiality, intellectual property, or dispute resolution
- State whether the agreement is legally binding (in whole or part, or non-binding)
- Be signed by authorised representatives of each party
It’s important to note that an MOU can be as detailed or as brief as you need, but the clearer and more specific it is, the greater the chance it will help both parties stay aligned and avoid misunderstandings.
Example of an MOU
Here’s a brief MOU example for a business collaboration:
Background: This Memorandum of Understanding (MOU) is entered into on 1 July 2024 by ABC Pty Ltd (ABN 12 345 678 901) and XYZ Pty Ltd (ABN 98 765 432 101) for the purpose of collaborating on the development and marketing of a new health product.
Principles: ABC will provide manufacturing expertise. XYZ will manage marketing. Both parties agree to meet monthly and share all relevant information on a confidential basis.
Non-Binding: This document sets out the understanding of the parties as at the date of signing. It is not intended to be legally binding except for the confidentiality clause.
Signed:
(Signatures and details of both parties)
For a more comprehensive MOU template or document specific to your situation, speak with us for tailored legal advice.
What Is an MOA? Is It Different From an MOU?
You might hear people use the term “MOA”, especially in international business settings. MOA stands for “Memorandum of Agreement”, and while sometimes used interchangeably with MOU, in Australia they typically mean different things.
- MOU (Memorandum of Understanding): Usually expresses the intention to work together under negotiated terms, but is generally not legally binding (unless stated otherwise).
- MOA (Memorandum of Agreement): Tends to be more formal and detailed, with a greater likelihood of enforceability. In many cases, an MOA is considered a contract, and is binding on the parties.
If in doubt, read the document carefully (or have it reviewed) to identify whether it’s meant to create legal obligations. If it looks like a contract, treat it as such and ensure it is drafted, negotiated, and signed with the appropriate legal advice.
How Do You Write a Memorandum of Understanding?
Writing an MOU involves much more than simply jotting down a few intentions. A well-drafted MOU should address the needs and risks for both parties, use clear and unambiguous language, and make it obvious whether (and which parts) the document is legally binding.
What Should Be Included in an MOU?
When preparing an MOU document, consider including:
- Title and date: Make it clear the document is an MOU and when it’s being made.
- Parties: List the full legal names of both parties (and ABNs if relevant).
- Background: The context or reasons for the MOU.
- Purpose or objectives: What are both parties hoping to achieve?
- Roles and responsibilities: Who is doing what? Spell out each party’s proposed contributions and actions.
- Key terms: Timing, meetings, milestones, resources to be provided.
- Confidentiality: Will information shared be kept private?
- Intellectual property: Who owns what, and what IP is being shared (if any)?
- Dispute resolution: How will issues be handled if things go wrong?
- Legal status: A statement declaring whether the MOU (or parts of it) is legally binding or non-binding.
- Signatures: Spaces for all parties to sign and date.
For a legally sound MOU, it can be risky to rely solely on generic templates you find online. MOUs need to be tailored to your business goals and circumstances – and all parties need to clearly understand what they’re agreeing to. Sprintlaw can help you draft, review, or negotiate a memorandum of understanding to give you peace of mind.
Step-By-Step: How to Write a Memorandum of Understanding
- Start by defining your objectives. What do you want to achieve in this partnership or collaboration?
- List the parties involved and provide background context. This helps put your intentions in perspective and demonstrates mutual understanding.
- Clearly outline proposed actions and commitments. Specify what each party will do and by when.
- Address key risk factors. Will confidential information be shared? Are there intellectual property concerns? How will disputes be resolved?
- Add a clause about the legal status of the document. Make it crystal clear if the MOU is meant to be non-binding or partially binding (such as for confidentiality).
- Ensure clarity of language throughout. Avoid vague or ambiguous terms that could lead to disagreement later on.
- Get both parties to sign and date the document. Authorised representatives only, and keep copies for your records.
For SMEs, MOUs can become complex quickly – especially if money, IP, or sensitive information is involved. Consider legal advice early to avoid pitfalls and costly disputes down the track.
Are MOUs Legally Binding in Australia?
The answer: Not always. In Australia, an MOU is only legally binding if the wording and surrounding circumstances show a clear intention by the parties to be bound. It often comes down to the specific terms used and the context in which the MOU was created.
That means an MOU can be:
- Non-binding overall: Just a record of intentions, with no legal obligations created.
- Partially binding: Certain clauses – such as confidentiality or exclusivity – might be drafted as legally binding, while the rest is not.
- Fully binding: If it includes all the ingredients of a contract and indicates intention to be bound.
If you want your MOU to be non-binding (except for certain clauses), say so plainly. For more information, our article MOU vs Contract digs deeper into this topic.
Always seek legal review before relying on, or signing, an MOU for important business relationships.
When Should I Use an MOU Versus a Legally Binding Contract?
An MOU can be ideal where:
- You want to document early negotiations or set the framework for a future agreement
- You need clarity around intentions, but aren’t ready for a full contract
- You want to formalise a non-binding partnership to attract funding, support, or regulatory compliance
- You’re working in a context where enforceability isn’t required (for example, a research collaboration or industry alliance).
However, if money is changing hands, confidential or sensitive information is being disclosed, or you’re committing to supply or deliver goods or services, you probably need a legally binding contract instead of – or in addition to – an MOU.
For example, you might sign an MOU early, then use it as the basis for drafting a Service Agreement, Shareholders Agreement or another contract once negotiations progress.
Do I Need Legal Documents With My MOU?
Often the answer is yes. An MOU can set out the “big picture” and make sure everyone is on the same wavelength – but it doesn’t replace the need for robust, enforceable legal documents wherever required.
Key legal documents commonly needed alongside (or after) an MOU include:
- Confidentiality Agreement (NDA): Protects sensitive information shared during negotiations or the early stages of collaboration.
- Service Agreement: Outlines the terms if you engage the other party to provide a service.
- Distribution, Supply, or Manufacturing Agreements: For structured arrangements around goods or products.
- Employment Contracts & Workplace Policies: If hiring or seconding staff as part of the collaboration.
- IP Agreements (such as licence agreements): When dealing with intellectual property and ownership issues.
- Shareholders Agreement or Partnership Agreement: If starting a business venture together.
Not sure which documents you’ll need? Read our guide on legal documents for business or reach out for a free chat.
Common Pitfalls and MOU Mistakes to Avoid
MOUs are a handy business tool, but problems can arise if:
- You believe an MOU is non-binding when some clauses actually are enforceable (such as confidentiality or exclusivity clauses left out of the “non-binding” section)
- Your MOU is so vague that it causes more confusion than clarity
- You use an MOU where a contract is really needed, putting your business at risk
- You copy a template without checking it suits your type of deal or Australian law
- You don’t review or update the MOU as circumstances change
To avoid these traps, ensure your MOU is specifically tailored to your business and your objectives, and get it reviewed by a lawyer if the partnership is important or involves risk.
Key Takeaways
- A Memorandum of Understanding (MOU) is a document outlining mutual intentions and principles between two or more parties in a potential business partnership or collaboration.
- In most cases, MOUs are not legally binding in Australia unless specifically drafted to be – always include clear, written statements about the document’s enforceability.
- Common uses for MOUs in business include early-stage joint ventures, collaborations, or partnership negotiations where you want clarity but aren’t ready for a full contract.
- MOUs should clearly set out the parties, objectives, roles, timelines, confidentiality, and legal status – clarity is key to avoiding future disputes.
- Not all MOUs suit every scenario, and you may still need robust legal agreements such as NDAs, service agreements, or shareholders agreements to protect your business interests.
- Seek legal advice before drafting, signing, or relying upon an MOU to make sure your interests are protected and you avoid costly pitfalls.
If you would like a consultation about drafting or reviewing a Memorandum of Understanding for your business partnership or collaboration, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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