It’s easy to confuse a contract with a memorandum of understanding (MoU). After all, both talk about agreements, and they’re made between two or more parties. But what’s the difference between the two?
While both documents set expectations in a relationship, a contract is a legally binding document, while the Memorandum of Understanding is not.
In this article, we’ll clarify the difference between an MoU and a contract, so you’ll know exactly which one to use for your upcoming deal.
What is a Memorandum of Understanding?
A memorandum of understanding (MoU) is a non-legally binding document that describes the agreement between two or more parties concerning their contemplated relationship.
MoUs are signed by all the parties involved, so it carries the tone of mutual respect while documenting a relationship of goodwill between the parties. It puts into writing each party’s intentions and actions, although most of the time, it doesn’t detail an implementation process.
A memorandum of understanding can be entered into by two parties (bilateral) or more than two parties (multilateral). It can serve as a preliminary document before crafting a formal contract.
What is a Contract?
A contract is a legally-binding agreement that two or more parties enter into after the acceptance of an offer. Contracts can be either written or oral statements, and they involve the exchange of something of value as an act of sealing the deal. This “something of value” is known as “consideration.”
Differences Between MoU and a Contract
Despite the similarities, there are fundamental differences between a contract and a memorandum of understanding.
One of the differences between an MoU and a contract is that, unlike a memorandum of understanding, a contract is legally binding.
In a contract, parties have the legal obligation to follow all the terms and conditions. They will face legal consequences if any term or condition is breached. On the other side, because an MoU lacks enforceability, it cannot be enforced in a court of law. Or, a court can rule such that only some parts of the memorandum are enforceable.
However, if an MoU meets the elements of a contract, it may still binding upon the parties. Even if the parties do not call it a “contract” or did not intend to be bound, meaning the obligations if one party has violated the MoU and caused some loss to the other party, the aggrieved party still has the right to recover the loss under alternative legal theories.
It can be a fine line between an MoU and a contract, so the parties should be careful about what they sign or agree to and consult an attorney if they need help discerning their liability. Despite the lack of legal enforceability, an MoU transaction can still lead to legal consequences.
A contract involves an offer from one party and the acceptance of it from another in exchange for something. As stated before, this is called “consideration.” Contracts typically detail each party’s obligations and the consequences of not fulfilling such obligations.
An MoU, in contrast, simply outlines the parties’ desires and intentions. A properly drafted MoU should be clear about the parties’ intentions not to be legally bound.
Regarding its content, the difference between a MoU and a contract is that an MoU typically memorializes key terms and expectations at the start of a working relationship, while a contract defines the specifics, terms, and conditions that each party needs to fulfill.
Essential elements of a Memorandum of Understanding
Since an MoU is not a legal document, it does not have specific requirements for its validity. However, here are some of the most common elements that can be found in a memorandum of understanding:
- Parties Involved
Describes each party agency, which means the participants that are involved in the agreement and will have to complete specific responsibilities.
It includes a description of the project and clarifies which is the intention of creating the memorandum of understanding
- Roles and responsibilities
The obligations of each agency and the way they will cooperate to the development of the project with specific activities.
- Timeframe: The period in which the memorandum of understanding will be effective. Furthermore, it describes when will the specified activities begin and the deadlines for deliverables.
- Signatures: The signatures of all the participants of the project represent an understanding of the roles and responsibilities stated in the MoU.
Essential elements of a contract
If you are entering into a contract, it’s crucial to look for the following points to make sure you’re not leaving anything important unread.
- Parties to the Contract
Know who should be involved and obligated. You may need to define not just two parties, but more.
How long should the contract last? Is there a system for automatic renewal? Is the term milestone-based or time-based?
What goods or services are to be exchanged? Why are the parties entering into the contract in the first place?
- Responsibilities and Rights of Each Party
What are the duties of each party? What are the exact expectations from each? Each party’s responsibilities should be spelled out in detail and in separate sections.
Can the contract be terminated if any party wishes to? Will there be a notice for the termination? How much notice is needed before the termination can push through?
Are there promises required to be made by one party to another?
What are the statements of each party that cause the other party to rely on as part of entering the contract?
Will the parties legally protect one another in case one causes a liability to the other?
Do the parties require insurance coverage?
- Choice of Law, Jurisdiction, and Venue
In case the parties belong to different jurisdictions, which law will govern the contract’s interpretation? What alternative dispute resolutions are available? In case required, where will lawsuits be filed?
When to use an MoU
A memorandum of understanding is generally used when two or more parties mutually agree on a particular matter and would need to put their agreement in writing to outline a relationship in general terms, but do not want to be legally bound.
You typically see this among nonprofits and charities. For example, it can define how two nonprofit organizations agree on sharing information or resources or the use of space.
This is also common for businesses when they have informal agreements as referral partners.
In a sense, an MoU is a kinder way to document a relationship.
When to use a contract
On the other hand, a contract is created when one party offers to do something, and another party accepts it in exchange for something of value to seal the deal.
If parties seek to rely on the other party’s representations, then it will be best to use a contract. A contract will contain all the expectations of each party and will define the consequences of the violations. It is often more practical for people to consider creating an MoU first to memorialize key terms of a deal. As more talks progress, parties can then use the MoU as the basis for creating a more concrete agreement in the form of a contract.
MoU or Contract: Which do I use?
Whether you’re representing yourself or a business, you will have responsibilities to fulfill in both a memorandum of understanding and a contract.
You’ll need a carefully crafted contract if you need to define terms, conditions, responsibilities, and the consequences of violating such terms and make sure they’re all legally binding. You and the rest of the parties involved will have the legal obligation to fulfill your duties as stated in the contract.
On the other hand, if you only need to document a certain agreement without intending to obligate either party to fulfill their part, you may opt for an MoU. Having an attorney review an MoU is equally important to make sure the parties did not accidentally enter into a contract.
You can also use it to memorialize key terms when commencing a working relationship or as a basis for a more significant, more complex deal that will need a formal and more complete contract in the future.
If you need assistance, don’t hesitate to contact us and get a personalized solution.