Memorandums of Understanding (MOUs) seem to be the weapon of choice in the for purpose sector. Commonly used to formalise joint projects and other collaborations between organisations, MOUs are popular because they are perceived to be a quick, informal and simple way to sketch out the terms of a relationship. Organisations need to be aware, however, that these seemingly innocuous documents can lead to confusing situations that might require legal advice to untangle, or leave one party exposed to risk.
This article looks at the top four things not-for-profit organisations should consider when entering into MOUs.
1. Is non-enforceability appropriate?
Before considering the content of the agreement, organisations should first consider whether a MOU is appropriate for what they are trying to achieve. Although MOUs do not have a set definition in law, they are generally understood to be a non-enforceable written understanding between two or more organisations.
This expectation of non-enforceability is the key characteristic of a MOU. It allows organisations to record their understanding and expectations without the deliberation required for a formal contract. This means that a MOU can be simple and cost-effective to prepare.
However, the strengths of a MOU – non-enforceability and easy preparation - are also its weaknesses:
- A MOU can be very difficult to enforce if one party does not live up to their side of the bargain. This can leave organisations exposed, particularly if a project or collaboration involves significant risk or potential liability. For example, MOUs are commonly used between parties collaborating to provide government funded services. The lead contractor may be unable to meet their obligations under the government funding agreement if they can’t enforce an MOU against their partner organisation.
- The perceived informality of an MOU means that they are often prepared without legal assistance. This can mean that the document lacks clarity or is silent on important matters. This creates uncertainty, which increases both the likelihood of dispute between the parties and the difficulty of resolving any dispute.
The nature of a MOU means that it is better suited for informal or good-will based collaborations of low value or low risk, such as:
- setting out a relationship in writing – for example referral pathways, information sharing or shared resources;
- working on a project or delivering services together;
- an agreement to agree - a loose understanding before formal negotiations on merging, contracting or working together; or
- confirming an advocacy position.
A more formal, enforceable agreement is more appropriate for:
- delivery of significant services;
- sub-contracting significant government or philanthropic funded projects;
- projects involving use of valuable intellectual property;
- risky agreements or projects that could result in significant liability; and
- relationships that require strict confidentiality, or where breaches of confidentiality will be harmful to beneficiaries.
The key questions for organisations considering entering into a MOU is – how severe could the consequences be for our organisation if the other party does not meet their obligations and we cannot enforce this agreement? If you need to be able to enforce an agreement, it is best to use a properly drafted contract.
2. Should at least part of the MOU be enforceable?
Even in the most informal relationships, it may be appropriate to have some terms that will be enforceable and can even survive the termination of the relationship. These need to be clearly distinguished from the rest of the MOU and may deal with matters such as confidentiality and non-disparagement.
3. A contract by any other name….would still be enforceable
Some organisations prefer a MOU precisely because it is non-enforceable – they don’t want the agreement to be able to “come back to bite them”. Organisations should be aware that simply describing a document as a “Memorandum of Understanding” or “Heads of Agreement” does not automatically make it legally unenforceable. It is not uncommon to see “MOUs” that are actually legally binding contracts.
The question is whether the parties intended to create a legally binding relationship. This will depend partly on the circumstances surrounding the MOU, and partly on the wording of the document itself. A clause stating “nothing in this MOU is intended to create legally binding obligations” is a great start. On the other hand, a MOU that is silent on intention but includes a large amount of detail (like specifics of the services one party will deliver, how they will be remunerated and consequences if the parties don’t meet their obligations) could in fact be a contract.
A key risk with a MOU that is a “contract in disguise” is that it will often not have been prepared with the care and deliberation that should go into an enforceable contract. It may also not have been through any requisite Board approval process.
4. Does the MOU cover off on the essentials?
There are essential matters MOUs should address. These help to ensure that the document is practical, comprehensive and captures matters that otherwise may be merely recorded in meeting notes and through chains of emails. A well drafted MOU will give clarity to all parties and help them to confirm that they are on the same page before they get started.
At a minimum, MOUs should address the following:
- details of the organisations, including a contact person (or people) for each party;
- the purpose or objective of the MOU;
- the agreed role and actions from each party;
- information about payment stages, triggers and amounts;
- a start and finish date;
- protection for privacy and confidentiality;
- a dispute resolution process; and
- a statement confirming that it is not intended to be legally binding – and excluding any provisions that should be binding and/or survive termination.
Depending on the scope of the MOU, it may also be useful to cover details like definitions, interpretation, relationship to other agreements and use of intellectual property.
Organisations should give careful consideration to whether an MOU is the appropriate way to set out the terms of a collaboration or joint project. Any MOU must be carefully prepared to ensure that it does not leave your organisation exposed.