A Memorandum of Understanding (MOU): What is it?

If you are interested in entering into formal agreements with other parties, a MOU is a useful tool as it ensures that all parties are on the same page. This Business Kitz blog sets out all the considerations you should take into consideration when dealing will a Memorandum of Understanding.

What is a Memorandum of Understanding?

A Memorandum of Understanding (MOU) is a written agreement between two parties that outlines the terms and conditions of a potential partnership or collaboration. MOUs are often used;

  • in commercial partnerships such as joint ventures, mergers and acquisitions, collaborations, to set out mutual goals, expectations, rights and obligations.
  • to avoid forming legal relations
  • to mark a mutually beneficial partnership

For example, if you are starting a new business, with the help of a MOU, you can outline the terms of your working relationship with your suppliers and customers. This way, you can avoid any misunderstandings when entering a formal contract in the future.

Whether in Australia or overseas, a MOU is a non-binding agreement that serves as a preliminary step towards establishing a formal contract. There are two types of Memorandum of Understanding;

  • Bilateral – an agreement between two parties
  • Multilateral – an agreement between more than two parties

What is included in a MOU?

The structure of a MOU can vary depending on the nature and purpose of the agreement, but a typical Memorandum of Understanding will include the following components:

  • Introduction: This section outlines the background and purpose of the MOU, including the names and addresses of the parties involved.
  • Objectives: This section outlines the specific goals and objectives of the collaboration, including the desired outcomes and benefits for both parties.
  • Roles and Responsibilities: This section outlines the specific responsibilities of each party and how they will work together to achieve the objectives outlined in the MOU.
  • Duration: This section outlines the expected duration of the collaboration, including the start and end dates.
  • Finances: This section outlines any financial arrangements between the parties, such as funding, expenses, and revenue sharing.
  • Termination: This section outlines the conditions under which the MOU may be terminated, including the procedures for termination and any consequences of termination.
  • Confidentiality: This section outlines the obligations of the parties with respect to confidential information, including restrictions on the use and dissemination of confidential information.
  • Dispute Resolution: This section outlines the process for resolving disputes between the parties, including mediation, arbitration, and litigation.
  • Governing Law: This section outlines the law that will govern the MOU, including the jurisdiction in which any disputes will be resolved.
  • Signature: This section includes the signatures of authorized representatives of both parties, indicating their agreement to the terms and conditions of the MOU.

It is important to note that MOUs are not legally binding in themselves and do not carry the same weight as a contract. However, they can be used as evidence in court to support a claim for breach of contract if one party fails to fulfill its obligations under the MOU. This means that the parties should take the MOU seriously and ensure that the terms and conditions are clear and concise.

MOU vs Contracts

Not typically legally bindingLegally binding
Not usually enforced by courtsEnforced by courts
Does not have intentions to for legal relationsDoes have intention to form legal relations
Does not require an exchange of promisesDoes require an exchange of promises
Is not final and can still be negotiatedIs complete and final

Legal Advice:

A Memorandum of Understanding is unique to each partnership and is a useful framework. Even though it is not legally binding, if the relationship is of high risk and has a lot at stake, seeking legal advice can be beneficial as you and your company will be made aware of the best possible agreement and any potential legal complications if you were to breach a term that can terminate the agreement.

If you have any questions or doubts, please do not hesitate to contact our sister company, Legal Kitz to assist you. To arrange a FREE 30 minute consultation with one of their highly experienced solicitors, click here today, or you can contact us at info@legalkitz.com.au via email or 1300 988 954 via a phone call. Additionally, you can also check out our Business Kitz Subscription to access our full range of legal, commercial and employment document templates to begin your business with a solid foundation that ensures compliance.

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