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We all know that a contract is a legally binding written agreement between parties, but how does a contract differ from a memorandum of understanding (MOU) and which form should be used in which circumstances?

What is a memorandum of understanding (MOU)?

An MOU is typically a nonbinding agreement between the parties that documents a relationship of goodwill between the parties.  MOUs spell out the parties’ understanding of the contemplated relationship between them and can be the first stage in the formation of a formal contract. 

Because an MOU is signed by both parties, it carries a degree of seriousness and mutual respect.  MOUs are stronger than a gentlemen's agreement and have the advantage of documenting in writing each party’s intentions and actions, though frequently without details regarding implementation. 

When to use a MOU

  1. Companies often choose to use an MOU instead of a contract because it is a friendlier, bipartisan expression of a working relationship than a formal contract.
  2. MOUs are frequently the preferred form of documenting agreements between nonprofit organizations and charities regarding the use of space or sharing of information.They are perceived as being less intimidating and threatening than an official partnership agreement, and
  3. MOUs are often used in cases where parties either do not want to imply a legal commitment or cannot create a legally enforceable agreement.

Is a MOU legally binding?

An MOU may not be legally enforceable since its level of specificity is typically insufficient to resolve misunderstandings when they arise.  An MOU may be just a “bare bones” legal contract that leaves itself open to interpretation if a conflict arises between the parties.

For this reason, attorneys often advise their clients to enter into contracts that fully document their expectations. A common practice for larger, more complex transactions is to create a non-binding MOU to memorialize the key terms of the deal and flush out the expectations of the parties.  Once that has been achieved, the MOU is then used as the outline to move forward with the negotiation of a definitive agreement.  Time, effort and expense is often saved with this two-step approach.