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How a Memorandum of Understanding Works

        Culture | Lawsuits

The Ties That Bind
Wait, this is a binding agreement? You mean I'm liable for all damages? Calling a contract an MOU doesn't make it so. That's a critical point to remember when you're signing important paperwork.
Wait, this is a binding agreement? You mean I'm liable for all damages? Calling a contract an MOU doesn't make it so. That's a critical point to remember when you're signing important paperwork.
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You've already seen the kind of information that's normally included in MOUs. This information often resembles the terms of a legally binding contract, but MOUs typically are not enforceable. However, there are exceptions and stipulations that can spell serious legal consequences for parties who break memoranda of understanding.

For example, if the content of the MOU is exactly like a contract in language and intent, then a court is likely to call it a contract, no matter what title might appear on the front page. This issue arises often, as parties attempt to manipulate the language of an MOU to resemble a contract without the risks of actual contractual obligations.

In another instance, although MOUs aren't binding, they may include provisions that are, such as privacy or nondisclosure agreements. If either party violates such provisions, they may be held liable.

There are standards for determining whether an MOU might be binding. A judge reviewing one would look for four key elements that normally define a contract: an offer, acceptance of the offer, an intention to be legally bound, and consideration (the benefits that each party bargains for as part of a contract).

A judge weighs such factors when determining whether the MOU is actually an enforceable document. If the MOU's terms are clear and coherent, and reinforced by consideration, then a judge would likely find the MOU to be a binding agreement, no matter what it's called. In short, if the parties intend for the entire document to be binding, they should probably opt for a contract instead.

It might sound kind of amusing, or perhaps just redundant, but in many situations, parties are very careful to make sure their MOU can in no way be interpreted as a contract. They do so by including disclaimers and phrases such as "This memorandum is not intended to and does not create any contractual rights between these parties."

Regardless of how cautious the authors might be, MOUs pose risks. In a business environment, these informal agreements lack the formalities and standardizations of a contract that would protect both parties during the project. As a result, legal remedies might be nonexistent in the event of non-performance or a lack of adherence to the MOU.

Those are some of the reasons that a lot of lawyers don't really like MOUs. Without standards, memoranda of understanding are often ambiguous, legally fuzzy documents that can lead to confusion and contentious appearances in court [source: McCormick]. Still, in spite of a lack of love from lawyers, MOUs come in handy in a lot of situations, such as skirting bureaucracy and skillfully limboing under massive amounts of red tape.


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