4.8

Google Reviews

Need Help? Contact An Australian Business Lawyer Today 1300 003 077
Search
Close this search box.

What is a Memorandum of Understanding?

Reading time: 5 mins

A Memorandum of Understanding is a formal document that sets out the principles underlying a prospective agreement between two or more parties.

A Memorandum of Understanding is also known as a “letter of intent”. An MOU is frequently used in business settings to establish and record the intention of the parties.

An MOU indicates the parties’ willingness and intent to proceed with a contract and is a pre-contractual document in anticipation of a future contract. As a result, you may want to use an MOU if you:

  • do not want to immediately enter into a legally binding agreement
  • want to outline a mutually beneficial business relationship
  • want to outline the mutual goals of a commercial partnership

A Memorandum of Understanding can be viewed as the starting point for negotiations because it defines the scope and purpose of commercial discussions. An MOU helps the parties to develop understanding and achieve progress in commercial negotiations.

An MOU is similar to a terms sheet or heads of agreement, but is usually more high-level and expressed in more general terms than these kinds of documents.

What is a Memorandum of Understanding?

Is a Memorandum of Understanding legally binding?

MOUs are not usually legally binding, but they can be.

An MOU can be a risky document because it:

  • may not be legally binding (but you want it to be)
  • may be legally binding (but you don’t want it to be)

An MOU that is not legally binding

A Memorandum of Understanding will not be legally binding if it does not contain all the elements of a binding contract.

Generally, parties will enter into a Memorandum of Understanding (or a Letter of Intent) so that they can quickly record the principles of an agreement, without creating a legally binding contract.

In some cases, the fact that an MOU is not legally binding may be a benefit, since neither party is required to fulfil the requirements of the MOU. Instead, they can walk away from the agreed principles or change their intentions.

To ensure a Memorandum of Understanding is not legally binding, an MOU will generally contain a clause that states “This document is not, and all parties intend that it is not a legally binding or legally enforceable document”.

An MOU that is legally binding

A Memorandum of Understanding may be legally binding if it contains all the elements of a binding contract.

What terms are usually included in an MOU?

The process of preparing an MOU often begins with each party offering its own best-case terms. Each party will consider their ideal or preferred outcome, what it believes it has to offer to the other part(ies) and what points may be non-negotiable on its side. This is the starting position for negotiations.

An MOU generally contains the following terms:

  • a description of the parties
  • the date of the document
  • a description of the project under consideration
  • the scope of the MOU, and each party’s role and responsibilities
  • the document is a statement of intent only
  • the document is not legally binding
  • an execution clause for the parties to sign

While it is not usually a legally binding document, an MOU is an important step in a commercial relationship. Time and effective drafting skills are required to negotiate and draft an MOU that accurately and appropriately records the commercial agreement of the parties.

What is a Memorandum of Understanding?

To create an MOU, the parties involved must first reach an agreement on the commercial principles. This provides the parties with a road map and visibility of what is important to the other before moving forward with a formal contract.

What is the difference between an MOU and a contract?

The differences between an MOU and a contract include:

  • a contract is legally binding, an MOU is (usually) not legally binding
  • an MOU expresses an intent to enter into a contract, whereas a contract generally expresses the full extent of the agreement and is not a precursor to something further
  • an MOU is a tool to record or negotiate commercial principles, whereas a contract definitively states the commercial arrangement

Memorandums of Understanding can take time to prepare. However, compared to the potential time and effort required to formally document a legally binding agreement, an MOU can be a good place to start and record some general principles that the parties agree to.

For example, a retailer and a manufacturer may enter into a professional business relationship by agreeing to an MOU. The MOU may outline how they will collaborate to achieve mutual commercial goals. They do not necessarily need to have agreed on prices or product standards at this point. They may later enter into a supplier contract outlining the cost and specifications of the products.

Memorandums of Understanding are an important part of doing business. An MOU allows each party to clearly state their goals and expectations of one another in general terms. Drafting an MOU can aid in the resolution of any high-level disagreements before each party enters into a legally binding contract.

Contributors: Farrah Motley (Director of Prosper Law), Nada Saleh (Legal Intern), Hadba Alzammam (Legal Intern) and Ziad Baraja (Legal Intern)

Memorandum of Understanding

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

Contact an Australian Business Lawyer Today.

Contact us for a free consultation

Contact Us For A Free Legal Consultation
About Prosper Law

We provide legal advice to business and individuals across Australia, no matter which State or Territory you are located. Our easy-to-access, online legal services mean that you can talk to our lawyers wherever you are, at a time that suits you.

4.8

Google Reviews

Get Your Free Guide Now
Need Legal Assistance?

Don’t hesitate – reach out for your free legal assistance today. Your peace of mind is just a click or call away!

Check Out Our Latest Blog Posts

drafting contracts
Building and Construction

Why do Construction Contracts need a Contract Lawyer?

Construction contracts are complex and carry significant legal risks. For this reason, it is important to engage a contract lawyer. Construction contracts are a critical document in allocating legal risk.

debt recovery lawyer
Labour hire licensing

Labour Hire Licences in Australia

Several Australian States require labour hire licences, including Queensland, Victoria and South Australia. Australia’s labour hire industry is important for businesses to have the flexibility and workers they need to

person using laptop computer
Contracts

Dangers of using ChatGPT in Contract Drafting

Artificial intelligence (AI) has become an integral part of many industries, including the legal sector. ChatGPT can be a useful tool and is praised by many for the human-like text