A memorandum of understanding (“MOU”) is a document that contains a collection of tenets between two or more entities that intend to establish a relationship. Often MOUs act as placeholders until the parties negotiate and prepare a definitive agreement.
Binding or Non-Binding
MOUs are often incorrectly assumed to be legally binding or not legally binding:
- Binding means that the parties are obligated to carry out the terms of the MOU;
- Non-Binding means the parties are not obligated to carry out the terms of the MOU. Non-binding is ideal when the parties are still determining if their relationship is viable; if it turns out that the parties cannot come to an agreement on key terms after the MOU is signed, a party can just walk away without legal consequences.
However, whether an MOU is binding depends on the circumstances:
- Did the parties intend to be bound by the obligations?
If so, then the name of the document is irrelevant—an MOU may still be binding.
- Are the obligations clear enough to be legally binding?
If so, then the name of the document is irrelevant—an MOU may still be binding.
A document can be called an MOU but the terms may be so specific that the document is in reality a binding agreement. For this reason it is important that the parties are clear in their intentions by including language such as:
| “This MOU is non-binding” or “…the parties do not intend to be legally bound by the terms of this MOU” | “…intending to be legally bound, the parties agree as follows” |
When should an MOU be utilized?
- If you want to provide a framework for the parties to negotiate a final contract;
- If you want to record key terms agreed to date;
- If you want to detail a party’s commitment for the benefit of third parties;
(ie: funding agency needs to see an MOU between UT and community partner before providing funds)
What should an MOU include?
- The proper names of the parties, including the University’s:
“The Governing Council of the University of Toronto” - The subject matter of the agreement and its objectives;
- Statement of intent to be legally binding or not legally binding;
- Essential terms including start date, end date, termination, etc;
- Signatures (authorized).
Consider whether the MOU should be binding or non-binding and prepare the MOU with that intention in mind. If the intent is to create a non-binding MOU, the terms can be high-level and vague (ie: the parties will cooperate to create global awareness of …) but need to make sense.
If the intention is to create a binding MOU, the obligations need to be clear and concise in order for them to be enforceable (ie: each party will contribute $X,XXX.XX annually during the term of this MOU to support the activities listed in Schedule “A”). The potential for enforcement requires that careful consideration be given to the language included in a binding agreement.