Misunderstood: Understanding Memoranda of Understanding
A Memorandum of Understanding (MOU) is generally used to record the basic terms of a transaction, in advance and in anticipation of more detailed and legally binding terms and conditions.
A MOU is not usually legally binding, however, it can be binding if it satisfies the six elements of a contract, set out below:
- Offer and acceptance – a contract is formed when an offer by one party is accepted by the other party;
- Intention to create legal relations – the parties to the agreement must intend to enter into a legally binding agreement;
- Consideration – consideration is the price paid (not necessarily money) for the promise of the other party;
- Legal capacity – not all people are completely free to enter into a valid contract (eg people with a mental impairment, minors);
- Consent – the consent of each party to the contract must be genuine; and
- Not illegal or void – the law does not enforce all contracts (eg contracts to commit a crime or prejudice the administration of justice).
If the parties to a MOU do not intend for it to be binding, then the parties should:
- include words to the effect “The parties do not intend this MOU to be legally binding” to help make the intentions of the parties clear; and
- ensure the MOU does not set out obligations for the parties. For example, does not use language such as “party A shall do xyz” but instead use “party A may do xyz”.
If you are in doubt about whether an MOU is binding or not, we can advise before you sign or agree to anything.