A Memorandum of Understanding (‘MOU’) reflects a relationship of goodwill between two parties in the form of a written document. It is useful to setting clear expectations in the form of mutually agreed, negotiated terms and provides certainty in how the business arrangement will unfold. It is therefore a common ‘first step’ in many business transactions. For example, consider using a MOU if you want to collaborate with another business and enter into an arrangement that is mutually beneficial. A MOU has significant benefits, as it strengthens collaboration between two parties towards a common goal. However, it is generally not legally binding – this is what makes a standard contract different from a MOU. However, there may be certain exceptions when a MOU is legally binding, depending on the circumstances and incorporated. For more information, you can read about this in our article, ‘Is a Memorandum of Understanding Legally Binding?’.
So what does goodwill mean in the context of a MOU? Understanding what it means in a MOU can be tricky. In short, goodwill is generally seen as an expectation and determines how the commercial arrangement will be performed. Here are a few key points to help you navigate:
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Setting expectations
Goodwill is an underlying expectation that both parties will act honestly, keep their promise and fulfil agreed obligations. It implies a level of ongoing trust between both parties and maintains confidence the other will perform their obligations (e.g. your ‘side of the bargain’). This is particularly important in the negotiation process of a MOU, as it determines what terms are negotiated between the two parties and outlines the relevant expectations. For example, it is common for a business to negotiate how they will share information with the other. There is an expectation the business will use this information on this basis. Businesses typically include a goodwill clause in a MOU. This is clearly outlines from the get-go the commercial transaction is performed on a goodwill basis.
Goodwill vs. good faith
You may have heard the term ‘good faith’ used interchangeably with ‘goodwill’. Effectively, they are the same principle and give rise to the same expectation. While there is no legal position goodwill is necessary under Australian Contract Law, there is still an expectation for parties to negotiate on the basis of goodwill. For example, there is an expectation for businesses entering into a franchising agreement to act in good faith to the other party. Where there is no goodwill within the negotiation process, it is likely the MOU will not be effective at all.
Concluding thoughts
It is important to understand a MOU reflects a relationship of goodwill between two parties. This principle determines how a commercial transaction will be negotiated, including the specific terms of agreement. Most importantly, without goodwill a MOU is likely not to be successful in its operation. We also suggest you seek legal advice prior to implementing a MOU to better understand if a MOU is suitable for your business needs.
