COUNCILS: Is that MOU really a legally binding agreement in disguise?

Local governments should beware of accidentally entering into a legally binding agreement instead of an intended memorandum of understanding

MOU or legally binding agreement

An MOU is a commercial tool that is usually not intended by the parties to be legally binding, and is used to detail the agreed intentions of the parties and provide non-binding parameters for the parties to progress those intentions.  However, an MOU can be legally enforceable as an agreement if it satisfies the criteria essential to forming a legally binding agreement. 

To form a legally binding agreement, each of the following criteria must be satisfied:-

• there is an offer, and an acceptance of the offer;
• there is an intention by the parties to create a legal relationship;
• the essential terms of the agreement are sufficiently certain;
• there is consideration moving from each party to the other party;
• each party has legal capacity to enter the agreement.

Whether an MOU being negotiated by a Council meets any of the above requirements will depend on the facts and circumstances of the matter in hand, and the content and language used in the MOU.

Tips to avoid an MOU being a legally binding agreement

To avoid unintentionally entering into a legally binding agreement, it is very important that any MOU is drafted to be entirely non-legally binding.

The following tips will assist you in preparing an MOU that does not unwittingly become legally binding:

• Avoid the use of “agree” or its derivatives; instead, use expressions (and their derivatives) such as “intend”, “desire”, “anticipate”, “expect”, “plan”, “aim” and “understand”.
• Insert a statement to the effect that the MOU is not intended to be legally binding or enforceable as between the parties.
• In the MOU, omit references, or statements, that the MOU establishes the basis for any future action, step or agreement.
• Omit any provision requiring the parties to exclusively deal with each other regarding, or insert a provision that states that each party is free to pursue independently and separately with third persons, the subject matter of the MOU.
• The MOU should not contain a governing law or jurisdiction provision.
• For any aspect or issue which needs to be legally binding, the MOU should provide that the parties will enter a separate and legally binding arrangement, to deal with the issue.  For example, regarding confidential information, an MOU ought to state that if a party provides another party with information which it considers to be confidential, the party can require the other party to enter a legally binding non-disclosure deed.
• In the signature provision, omit any reference to the parties entering into the MOU “as an agreement”.
• In the signature provision, replace the expression “Executed” with “Signed”.

If you need assistance properly wording an MOU, or need advice on whether you have accidentally entered into a legally binding agreement, please email Karyn Wernham or James Neilson, or call us now on (07) 3243 0000.