Memorandum of Understanding Versus Contract - A Quick Guide

When businesses look to create formal or informal agreements, they are often deciding between using a Memorandum of Understanding (MOU) or a more traditional contract. Both documents attempt to outline the terms and intentions of an agreement, but they serve different purposes and carry different legal implications. 

Typically, a Memorandum of Understanding provides a basis to be followed through future negotiations or agreements. 

Such an agreement usually is nonbinding and forms the framework for matters without the presence of legal liability. 

A contract, on the other hand, is a legal agreement between parties, holding each accountable for the terms agreed upon. 

The choice between an MOU and a contract will depend on the level of formality and commitment required for the specific business relationship. 

In this blog, we are going to go through the most important differences between an MOU and a contract, so you know when to use each and why. 

Key Takeaways 

• A contract is typically legally binding in the sense that obligations are enforced. An MOU is a generally nonbinding framework for either cooperation or discussion. 

• MOUs are often used in the preliminary stages of business dealings, while contracts are employed once both parties are committed to specific obligations. 

• Understanding when to use an MOU versus a contract is very important to making sure your agreements are legally sound and appropriately enforceable. 

• Effective contract management tools, such as those available from Microsoft 365, also help make the creation, tracking, and management of MOUs alongside contracts more streamlined. 

What is a Memorandum of Understanding (MOU)? 

A memorandum of understanding (MOU) is a written document that expresses the intentions or agreements between two or more parties. 

In most cases, an MOU is an agreement that forms the basis of a more formal contract, given the understanding of the parties before moving to a more formal contract. 

This is how MOUs are common in setting expectations or establishing a framework for future discussions or actions between the parties without a commitment to terms and legal obligations. 

An MOU typically is a guide to collaboration or a partnership. 

It can be used in a wide variety of contexts, such as business ventures, partnerships, or governmental agreements. 

The document usually contains key objectives, roles, responsibilities, and general expectations of the parties involved. 

While an MOU is usually not legally binding, it could indicate a genuine intention to cooperate, and clarify misunderstandings that might otherwise blow up into full-blown conflict. 

In a few cases, portions of the MOU may be enforceable in a court of law, depending on how it has been drafted; however, more often than not, it's a tool of goodwill and mutual understanding rather than an enforceable contract. 

What is a Contract? 

A contract is a written, binding agreement between two or more parties that states specific conditions, terms, and obligations. 

Unlike an MOU, a contract has legal weight, meaning that the parties involved are bound legally to fulfill their commitments as stated in the document.  

To be considered a contract, an agreement has to meet the following criteria: mutual consent, a clear offer and acceptance, and consideration. 

This is the consideration of something of value being exchanged. Once all parties agree on the terms, they sign the contract, making it enforceable by law. 

Contracts are essential because they ensure security and clarity for all parties involved. 

It is a guide on what to expect from the other party so that the terms of the agreement are well understood and agreed upon. 

Legal Enforceability: MOU vs. Contract 

The main difference between a Memorandum of Understanding (MOU) and a contract is its legal enforceability. 

A contract is a legal document, meaning that if the party does not conduct itself according to the terms of the contract, there is the option to go to court. 

An MOU, however, is generally not legally enforceable, although it may describe a mutual understanding or intent. 

MOUs are often used when the parties want to lay out general terms or start a collaboration without immediately committing to a formal, binding contract. 

It's a tool for clarifying the framework for future agreements or cooperation but does not carry the same legal weight as a contract. 

The enforceability of an MOU is determined by its language and the context in which it was issued. 

In certain instances, a court may regard an MOU as a binding agreement if a specific language is present in the document indicating the intention to create legal obligations or terms that are defined and can be clearly acted upon. 

When to Use an MOU Instead of a Contract 

Choosing whether to use an MOU or a contract heavily depends on the nature of agreement, level of commitment, or the intentions that the parties aim to accomplish in the course. 

Generally speaking, an MOU is suitable in cases where both parties intend to articulate their intentions, outline a course of action that they may embrace, but this agreement shall not amount to being made legally binding between them. 

An MOU can be useful when entering into a partnership or collaboration that is still in the very early stages and you're trying to create a foundation to support future negotiations. 

It's commonly used when you need to obtain buy-in from several stakeholders or when the terms are fluid and open to change. 

An MOU helps in business or international relations establish a mutual understanding, ensuring all parties are on the same page before committing to more formal and binding agreements. 

Use an MOU when you want to establish a clear, shared understanding of expectations and goals, but there's no immediate need for legal enforcement. 

How to Draft an Effective Memorandum of Understanding 

An effective Memorandum of Understanding needs to be crystal clear, direct, and concentrate on the actual essentials that define what an agreement is between parties. 

While contracts usually have a sense of legal finality to them, most MOUs lack such legal commitment. 

However, an MOU must still be worded precisely enough to prevent misinterpretations. Here is a simple recipe for a good MOU. 

1. Identify the parties involved: Start by clearly specifying the names of the parties to the agreement in question. That could be one or more individuals, organizations, or otherwise. Be accurate and use a legal name not to cause future confusion.
2. Purpose: Outline the purpose of the MOU. Why are parties coming together? What do you aim to achieve through this collaboration or understanding? The purpose should be clearly defined, allowing all parties to know exactly what they are agreeing to.
3. Outline Roles and Responsibilities: An MOU should define, in detail, the roles and responsibilities of both parties. Who does what and what each party has to bring in should be stated clearly so that expectations are clearly set and responsibilities are met.
4. Set the Terms and Conditions: Although an MOU is generally not a legally binding document, the agreement should have some specific terms both parties will commit to adhering to. This includes timelines, deadlines, resources, or other relevant stipulations governing the partnership. Be brief yet comprehensive.
5. Provide any Confidentiality or Exclusivity Conditions: Sometimes, an MOU will have confidentiality or exclusivity clauses included. If there is sensitive information that will be shared, for example, it is often necessary to state how such information will be treated and whether exclusivity agreements apply during the partnership.
6. Add a Timeline: An MOU should provide clear timelines or milestones of when some certain actions or deliverables are expected. This manages expectations and helps keep the collaboration on track.
7. Signatures: Although an MOU does not have the same legal enforceability as a contract, everyone should sign on the dotted line for the document to be considered formal. All parties are considered to be in agreement with the terms and conditions outlined in it. 

Finally, make the language clear and plain. 

An MOU is intended to achieve mutual understanding and not the reverse. 

So, avoid unnecessary technical terms or intricate language that confuse all parties that are supposed to interpret the same document. 

The Role of MOUs and Contracts in International Business Agreements 

MOUs are often used as entry points for international partnerships. 

It clearly states the mutual understanding between the parties, key objectives to be pursued, and the direction of the partnership. 

Not being a legal binding force, MOUs outline the framework to guide negotiations while creating intent. 

Contracts offer the legal framework for each party to perform their end of the deal and to share risks. 

Global agreements, by nature, have contracts to determine enforceable terms, adherence to laws, and protection for parties involved. 

As MOUs give way to mutual trust and defined expectations, a contract is required to offer the legal security to make the business deal secure. 

Final Thoughts 

Basically, MOUs tend to be more flexible as they outline common intent, yet contracts ensure the legalistic reinforcement of commitments. 

Knowing when to use what, businesses will be confident in their negotiations and be able to close more effective partnerships. 

With a proper contract management system, it would be ideal to manage all such agreements by using Dock 365. 

Built on Microsoft 365, the tool handles the contract's entire life cycle, including drafting, signing, and tracking. 

It manages the entire contract lifecycle, from drafting to signing to tracking, and ensures smooth management of both MOUs and formal contracts. 

Book your demo today and find out how Dock 365 can change your game with contract management.