Is a Memorandum of Understanding Legally Binding?
Unsure whether your Memorandum of Understanding (MOU) is legally binding? In this article, we discuss the circumstances where a MOU can be legally binding.
Generally, MOU’s are non-legally binding agreements between multiple parties. A well-drafted MOU is a great preliminary tool to communicate the mutually agreed expectations of all parties involved in the negotiation stage without engaging in the strains of contractual negotiations.
Usually, the parties that enter into an MOU have no intention for their agreement to be legally enforceable. This is generally what distinguishes MOU’s from contracts. However, it’s important you are aware of the situations when your MOU can become legally binding.
Is an MOU legally binding?
It’s important to be aware that even if your document is titled as an MOU, it may still be considered legally binding. Look at the language used in the MOU and the certainty of the terms. They are great indicators to show if you are legally bound. It is also possible that some sections of your MOU are binding and other parts are not. Include a term that states clearly and unambiguously your intention not to be legally bound by all (or some) of the terms. This is an easy way to prevent your MOU from being legally binding.
Therefore, before you sign, it’s important that you are aware if any party intended for certain terms of the agreement to be legally binding. We recommend you seek legal advice before signing so you are certain whether the terms and conditions can be legally binding.
Does it satisfy the legal requirements?
To be enforceable, your MOU needs to satisfy the formation principles found in contract law. Simply put, if you satisfy the following elements, your MOU will be legally binding:
Refers to the exchange of anything of value (at least to the parties) in exchange for something else. Such as the other parties’ performance or promise to perform.
Take, for example, an agreement to sell a phone. The buyer promises money in exchange for the seller promising to provide the phone. This exchange amounts to consideration.
Did you intend for your MOU to be legally binding?
MOU’s are legally binding if you show that the parties intend to be legally accountable to the agreed terms. A great way to avoid uncertainty whether your MOU intended to be legally binding is by inserting an express clause that states whether or not the parties intend to be legally bound by the terms agreed upon. The more parties have at stake, the more likely they intended to receive legal protection.
Further, look for clauses that explicitly state whether the parties intend for the law to bind them. This helps you understand who intends to be bound. If parties don’t wish to be legally bound, then a clause should be included that states clearly they do not wish to be legally bound. If you are still unsure, seeking legal advice will clarify any issues you might have.
The certainty of the terms.
It may sound straightforward but in order for your MOU to be legally binding, the terms must be clear and concise. Look at the language of your terms. If your MOU contains terms such as “usual terms” or “fair and equitable price”, it’s likely to be interpreted as too vague to be legally binding.
It is common for MOU’s to not be a complete agreement. This is due to the relaxed style of MOU’s compared to contracts. As MOU’s are preparatory to contracts, often parties haven’t yet agreed on and defined all of the essential terms. This is common where parties are still negotiating and are yet to agree on all essential terms. In these situations, the MOU is unlikely to be legally binding. Ask yourself whether your MOU indicates that you have reached an agreement and all essential terms have been clearly defined. Or alternatively, those negotiations are still ongoing.
MOUs and contracts are both useful ways to define your commercial relationship between parties. Misunderstandings are common in scenarios where parties assume that their MOU is legally binding by default. If you require a legally enforceable document, we recommend you have terms clearly defined in written form and reviewed by a lawyer. This will prevent any uncertainty or confusion in the future.
If there is anything you are still unsure about, seek some specific legal advice before you sign any agreement.
James is a Legal Tech Intern at Lawpath. He is currently studying a Bachelor of Laws and a Bachelor of Business, majoring in Finance at the University of Technology Sydney.