What Is a Memorandum of Understanding vs. Contract
We now take a closer look at Memorandums of Understanding (MOUs) and Contract Agreements and point out their similarities and differences. First of all, what is a Memorandum of Understanding? A Memorandum of Understanding is a handwritten, typed or a printed document that describes the intentions or expectations of two or more parties for entering into a business transaction or legal agreement. A Memorandum of Understanding is a writer’s outline or "cheat sheet" to be used before actually entering into a formal written contract. It is not a contract, but often sets out in writing the parties’ anticipated obligations, terms and conditions. A Memorandum of Understanding does not have to be supported by consideration (sufficient legal right, value including benefit to a party or the anticipation of lawful gain) and can be easily and quickly prepared. It can thus be utilized to show at a later date real estate, business, employment or other interests and/or expectations of the parties before they get tied up in a formal contract agreement.
What is a Contract Agreement? A Contract Agreement is a written agreement between two or more parties that creates legally enforceable rights and obligations between the parties. A Contract Agreement is a more formal and detailed document that must use words that the parties to the document want to be legally binding. Contract Agreements also impose obligations that are enforceable in a Court of Law. One key provision to which all Contract Agreement should revolve around is consideration. Let’s take a look at the concepts of consideration.
Consideration and contract formation Consideration is the legal right , value, interest, or profit accruing to one of the contracting parties, or the legal detriment going to the other contracting party, or to any other person. Consideration can include the receipt of money, property, services, or anything else of value. The necessary elements of consideration are legal benefit and legal detriment. The legal benefit is received by the promisor and is what the promisor demands and receives as the price for the promise or act. The legal detriment is received by the promisee and is what the promisee is not otherwise legally obligated to give and what the promisee gives up in exchange for the promise or act. Typically, the consideration given by each party under an agreement is the price or remuneration to be paid and received under the agreement whether in cash, delivery of other property, the performance of services or the refraining from performing some service.
Conclusion Both a MOU and a Contract Agreement are ways of expressing the intent and expectations of parties. In this regard, both documents are similar. However, unlike a Contract Agreement, a MOU is not a contract because it lacks elements such as consideration, and cannot be enforced in a court of law. The MOU is simply a way of expressing the parties’ expectations before they get tied up in a formal contract agreement.
Legally Binding
MOUs and contract agreements have different legal binding natures despite their similar purposes. Generally, an MOU is not considered to be legally binding and therefore, non-enforceable in a legal context. The reason for such a conclusion may lie in the fact that the parties have no intention of being legally bound and may not fulfil the contractual obligations in the absence of a contract. Alternatively, if the MOU states its confidentiality nature or is meant to keep the intentions of both a party and the MOU confidential, the documents could also be non-binding.
On the other hand, a contract agreement, once signed, will be legally binding, assuming there are no elements present that make it void or voidable. In general, a contract agreement is legally enforceable unless one of the parties believes there was a case of misrepresentation, undue influence, mistake, illegality, or duress leading up to their signing of the contract. A contract agreement is legally binding until the performance of the contract agreement has been completed or an impossibility of performance occurs, at which point the contract agreement will no longer be binding.
Required Formalities
Both MOUs and contract agreements can have formalities and requirements attached which must be met. For a contract to be enforceable, certain formalities are typically required depending on the agreement. For instance, pursuant to the Statute of Frauds, for a sale of goods greater than $500, a contract must be memorialized in writing. If the contract in question does not fulfill the formalities and requirements (for instance, it is an oral agreement whereas a written one is required), the contract will fail. Contract agreements must also involve an offer, an acceptance, consideration, and a mutual intent to be bound by terms. Although MOUs do not typically feature memorandums regarding performance and discussions (as contract agreements do), MOUs, like contract agreements, must include certain formalities and requirements. Indeed, given that MOUs are typically created by foreign governmental bodies, they require some type of approval by the relevant parties (for instance, the government). Additionally, MOUs may need to be in writing (the Swiss Federal Supreme Court has held that an oral MOU is as binding as a written one). At times, depending on the circumstances (such as with treaties), additional efforts must be taken (such as ratification).
Application Scenarios and Examples
To illustrate the practical uses of MOUs and contract agreements, it […]
consider how different industries typically use each document.
Government Use
Government entities frequently use MOUs to formalize relationships with other government or non-profit entities regarding programs. For example, a state government may enter into an MOU with a local government to facilitate a supplemental nutrition assistance program, such as the Supplemental Nutrition Assistance Program (SNAP). The MOU would likely cover each party’s obligations as well as reimbursement for certain administrative costs.
For larger procurement projects, a government entity will often enter into a more detailed contract agreement with the contractor, including appropriate contractual clauses.
Academic Institutions
Academic institutions often use MOUs to establish partnerships with prospective research collaborators. Academic institutions may also use MOUs to outline the parameters of debt-forgiveness programs, such as "jobs for people with disabilities" programs.
Private Industry
Private companies frequently use MOUs in the context of a potential sale or joint venture. In these cases, the MOU can take the form of a letter of intent. The letter of intent will usually provide for subsequent negotiation of a more detailed agreement or convey goodwill between the parties to begin further negotiations. The participants might also enter into a contract agreement if the project requires detailed representations and warranties.
Non-Profit Entities
Non-profit entities may enter into MOUs with other non-profits or other private entities. For example, a non-profit that receives a grant may enter into an MOU with a grantee that outlines how the grant money will be used.
Examples of MOU and contract use in private industry:
An MOU in connection with joint venture financing – a joint venture in which two or more stakeholders are working together to share resources on a particular project.
In the hospitality industry, students at a culinary school may enter into an MOU with a restaurant to serve their food through a partnership.
A loan between a bank and a commercial box company can be set forth in an MOU or contract. An MOU is recommended if the business is going to be seasonal, with borrowing occurring only in the winter, with repayment in the summer.
An international sale and distribution contract can include an MOU that describes the nature of the products included for sale.
Pros and Cons
Each of MOUs and contract agreements has its own advantages and disadvantages to consider prior to execution. The MOU is typically more flexible to structure than a contract. The parties usually have more freedom to write exactly how they wish the relationship to flow. This flexibility allows the parties to re-arrange the details as their needs adjust in the future. While the MOU is less likely to be enforceable in a court, the parties can rest assured that their communications are still confidential. This is helpful in instances when the parties wish to negotiate or discuss sensitive matters. Some legal experts recommend that the MOU should be executed first to help the parties and their counsel structure a deal that works for them . Once an agreement is set, the parties can decide whether it is necessary to progress to a contract agreement.
The primary benefit of a contract agreement is that the legal terms written with specificity are likely to be enforced in a court of law. When a dispute happens, the involved party may sue the other to receive compensation. If the court finds that the other party did breach the terms of the contract, they may order them to complete whatever forms of reparations are listed in the contract agreement. When written well, the contract will comply with all relevant laws. Another benefit is that the contract may allow the parties to decide which jurisdiction or state laws will be used to interpret the contract.
Elements to Incorporate
Both MOUs and contract agreements should include the following components:
Parties
This section includes the names of the parties to the agreement. When drafting an MOU, it is important to remember that there should be one MOU between each group and AACN. It might be helpful to add "on behalf of" after the name of the university. Also, include the address for each party. MOUs between two groups include the term "party" in the singular, rather than "parties" when a group is signing alone.
Recitals or Background Section
Whereas clauses are a short paragraph that states why the parties are entering into the agreement.
Purpose
This section should be located at the beginning of the agreement and state why the groups are entering into the agreement and what is the purpose for the legal document. This is similar to, but not as formal as, a recital in a contract. Rather, it is a short statement on the purpose of the MOU or contract.
Definitions
Spell out acronyms at the beginning of the document.
Scope of the Project and Activities
This section allows you to specify and identify what is going to be done. It should include specific information on project activities, who is responsible for each activity, and the timeline for each activity. For example, if a single group is signing, it should be clear how each member of the group is participating in the agreement.
Responsibilities
This section identifies how much responsibility each group has for the project, what costs are associated with each specific activity, who is expected to provide the major funding, who is making the major decisions about the project, and the administrative duties of each group.
Funding
Funders often want to be acknowledged in the agreement. The funding document itself may have additional requirements.
Termination
The termination clause for an MOU is less formal than a contract; however, it should define if there is an expiration date for the MOU and what the steps are if there is an early termination. Usually if there is a grant or other type of funding, there is a set end date.
Ownership of Data and Products
If the grant is supporting research, specify whether the data belongs to the nursing program or research team and not to AACN. Publications should also be referenced here by naming authors, co-authors, and roles of each.
Intellectual Property
Depending on the type of program, it is important to address who owns the intellectual property. Although this is not usually a problem between academic partners, it can become an issue when there are for-profit partners. In those cases, the individual or team creating the intellectual property and data may own the data without spelling it out in a contract.
Determining the Appropriate Choice
It can often be a challenge to decide whether an MOU is the most appropriate way to memorialize the statements of the parties and their intent, or whether a more formal agreement would better address the situation. Certainly, there is nothing wrong with the use of an MOU as a device for documenting agreements on issues that do not necessarily require the intensity that a fully negotiated and written contract entails. And, some businesses may be comfortable outlining their obligations in relatively informal terms. In contrast, if a party is looking to document more formal contractual obligations, they will likely not be satisfied with an MOU clarifying terms that could be more clearly and specifically set forth in a contract.
For the most part, an MOU is well suited for situations in which the parties are agreeing to explore the possibility of entering into a much more formalized commitment at a later date, but want to reduce to writing the existence of the possible relationship, and their intention to pursue a formal agreement sometime in the future . An MOU is also useful as a way to set forth expectations on a certain limited matter, for example, an initial commitment by each party to share in the costs associated with evaluating a certain business, or to undertake additional research on that business in anticipation of a potential more formalized arrangement.
Some businesses that enter into MOUs may not have the resources to enter into a full contract, so an MOU may be an appropriate option for these companies. In addition, some companies want the flexibility of avoiding a long-term commitment in entering into a potential partnership that may or may not move forward. Accordingly, an agreement that addresses this uncertainty while also allowing both companies to move forward with the initial steps necessary to explore the viability of the proposed business relationship is quite sensible.