A Memorandum of Understanding (MoU) is an agreement made between parties which lists the main elements of their relationship. Usually, it’s an agreement that is made before the signing of a formal agreement. 

An MoU will usually display the intent to enter into a legally binding contract sometime in the future. The document will contain the main aspects of the potential future agreement.

What Is A Contract?

A contract is a legally binding agreement between two or more parties. They contain duties and obligations to one another which are legally enforceable. 

Contracts contain the elements of intention, capacity, offer/acceptance, and consideration. If you do not comply with the terms of a contract, you will likely face legal repercussions.

Elements Of A Contract

In order for a document to be considered a contract, it must meet the following requirements.

  • Intention – parties must clearly intend to enter into the agreement
  • Capacity – the law recognises that some people cannot enter into a contract (for example, if you are under the age of 18)
  • Offer – there needs to be something being offered for consideration
  • Acceptance – the other party must indicate their acceptance
  • Consideration – something of value needs to be exchanged in acceptance of the offer

Contracts must adhere to Australian contract law. So, it should not have any elements which may make it void or illegal, such as any unfair contract terms

To summarise, a contract is a deal where there is an exchange for something and both parties benefit from it. Overall, there needs to be an offer, acceptance by all parties of that offer, consideration for the offer, capacity and legality.

How Is This Different From A Memorandum Of Understanding?

A MoU does not contain the same elements of a contract. A contract will have a benefit for both parties as its purpose. For example, an act of service in exchange for monetary compensation.

An MoU is commonly used as a document detailing the main parts of an agreement prior to the formal signing of a contract. However, this is not their only function. 

They also have the purpose of being a ‘gentlemen’s agreement’ where it contains an agreement intended by multiple parties without there being an exchange of some sort. This distinguishes it from a contract as mentioned above, as a contract must contain an offer and consideration for that offer. An MoU is more of a document of goodwill.

Using An MoU Prior To A Formal Contractual Agreement

An MOU is commonly used prior to drafting the main contract in the earlier stages of an agreement.

You have not formally agreed to anything yet so you are not bound by it. Not following through on the MOU will usually have no legal consequences.

Example
Tim and Jenny are engaged in a negotiation regarding a sponsorship deal. At this point, they have agreed to the general terms of the agreement and this is noted in a MoU. 

However, down the line, Tim decides they no longer want to work with Jenny. As they have not signed a formal agreement, Tim is able to exit the deal without facing legal repercussions.

What Are The Elements Of An MoU?

The elements of an MoU will depend on the context and the purpose it serves to the parties utilising it. Often, it will contain the most important or basic terms of an agreement.

This may include:  

  • Privacy and information clauses
  • Liability clauses
  • Identification of all parties
  • Key dates and concepts
  • The benefit or purpose of the agreement for each party
  • The duties of each party 

Can A MoU Be Legally Binding?

As a general rule, an MOU is usually not legally binding. MoUs that are created as a preliminary step to signing a formal contract can show an intent for a future legal relationship between the parties; however, it will most likely not be considered a legally binding document. 

Luckily, there has been case law diving into their legality. 

Masters v Cameron

The case of Masters v Cameron is significant when looking at MoU’s. 

Both parties had an MoU detailing Masters’ agreement to purchase a property from Cameron. However, due to changes in their financial situation, Masters was no longer able to purchase the property. 

As they had not entered into a formal, legally binding contract for the property yet, Masters felt he was able to rescind his offer. However, Cameron argued they had a legitimate deal that needed to be honoured. 

The court eventually sided with Masters, stating the MoU was not a legally binding contract.

What Are The Benefits Of A MoU?

Just because an MoU is not a legally binding document, it does not mean it is completely useless or should be written off. In fact, it’s a great precursor to a formal agreement or even a great way to put an agreement between parties into a document, without enforcing the document legally. This is a way to avoid misunderstandings between parties and ensures that all parties to the contract are on the same page. 

An MoU can also serve as a document to refer back to if someone changes their minds. Overall, MoU’s can be a great written way to record what everyone has said.

Example
Let’s say Annie, Chelsea and Bianca agree to enter into business together for the next three months. However, during their talks and negotiations, many ideas get thrown around, some agreed to and some taken away. This can lead to some misunderstanding on where everyone stands at the end of a meeting. 

Annie proposes an MoU, where the main points are set out and the most important aspects of their deal are laid out. When drafting the MoU, everyone’s intentions become clearer and are set out in one document. This also makes it a lot easier for all parties to refer to the MoU during negotiations.  Essentially, this would be an effective use of an MoU. 

Next Steps

An MoU cannot replace a contract. As seen in the examples above, an MoU is best utilised before the creation of a formal agreement. 

If you want something that is legally binding and can hold all the parties of the agreement to their word, then a formal contract is the way to go.

If you have any questions or want to discuss your options regarding MoU and contracts, our team at Sprintlaw is more than happy to assist.

If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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