Working together. It’s a good idea, and a great way to move us all forward. However, sometimes working together can be tough. Sometimes things get lost in translation or misunderstandings. So how can we work together better? Especially if it’s two businesses or non-profits working together where understanding liabilities, responsibilities, and expectations are crucial to its effectiveness. We often think of standard contracts when doing business with someone else, but what if no money is changing hands, or it’s more about the collaboration than compensation? One of the ways to memorialize a relationship between people, companies, non-profits, or any combination thereof, is through a Memorandum of Understanding.
Memorandums of Understanding or MOUs are very similar to, and can be the same as, a contract. MOUs are sometimes viewed as a step-up from handshakes but a step below contracts. Both contracts and MOUs are documents in which any number of parties can agree to certain terms and promises. The major difference is that MOUs are not typically legally binding. If something is not legally binding, a court will not enforce it. This means that one party could walk away from an MOU without much worry. If the other party were to sue for not following the MOU, the court would not award damages to the party who was harmed when the other party walked away.
However, just like if it looks like a duck and quacks like a duck, it’s a duck; if an MOU looks likes contract and intends to bind the parties like a contract, it’s probably a legally binding contract. This means that a party should not hastily walk away from an MOU just because it is an MOU. If the MOU is legally binding, you could be forced to pay damages to the other party.
Since they are not typically binding, MOUs are used as guides. The parties and sometimes courts and attorneys use MOUs to understand intentions, responsibilities, appropriate actions, and remedies.
Believe it or not, these odd documents in-between a handshake promise and a formal contract can serve very important purposes. MOUs are a great tool if parties wish to have a cooperative and collaborative relationship but don’t have the typical exchange of goods, services, or money (sometimes thought of as “consideration”). Also, MOUs are used as agreements before a formal contract is finalized to lay out how the parties will work together to get to a final contract. They have been used to formalize the relationship of businesses working closely together to draw the lines between how they will work together and how they will ensure they remain separate. MOUs can be used to delineate which party is responsible for what liability, which can be key when working together. MOUs also tend to be used by government entities to agree to a goal’s parameters upon which no legal actions may be taken. Small businesses tend to use MOUs to ensure accountability and ease with other small businesses in which the stakes are low, so a formal contract would be too burdensome. Overall, they can be used in any situation centered around working together, helping each other out, or shared goals, rather than a direct exchange of consideration.
MOUs can be customized to craft a document that meets the unique needs of the situation. As far as what should be in your MOU, that is completely up to you and the other party entering into the MOU. You could start by considering what you need to address, and how you see your relationship. However, there are some pretty standard provisions you will probably want in your MOU such as:
- Parties involved (a little about the parties)
- Term of the MOU (when does the MOU begin and how long it will last; can it be renewed; are there check-in dates)
- Mutual goals of the MOU (lays out what the parties want out of the relationship)
- Understandings & obligations (these help hold the parties responsible for their side of the MOU)
- Termination clause (how parties can get out of the MOU before the end of the term - typically looser and easier termination terms than a traditional contract)
- Conflict resolution (what happens when there is a dispute - most MOUs encourage parties to meet to resolve conflict rather than go to court)
- Place for parties to sign (also a good idea to have contact information somewhere on the MOU)
These are just general provisions that most MOUs have. Every MOU is different and most require additional or unique terms than those listed above.
Overall, MOUs can be a great tool for parties looking to work together but not through the formality of a contract for any number of reasons. Most importantly, they help make sure everyone is on the same page and understands what they hope to get out of the relationship, which can be a great key to collaborative success!
This blog is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney and accountant.