Parole MOU or Contract Defined
An MOU (Memorandum of Understanding) is a formal agreement between two or more parties. It describes a common line of interest between the parties, and also includes general plans for how this line of interest will be pursued. MOUs are usually made in situations where the agreement does not need to be legally enforceable . Comparatively, a Contract is a written or oral agreement that is enforced by law. Contracts are made up of six key elements, including mutual agreement, consideration, capacity, lawful object, mutuality of agreement, and intent.
Legal Effect of MOUs
MOUs can have significant legal consequences, depending on the language used. The term "memorandum of understanding" is often just a euphemism for a non-binding agreement, but not always. Whereas some see an MOU as merely a letter of intent that documents a meeting of the minds without creating binding legal obligations, others use the term to assume otherwise, namely that the MOU, whether in the form of a letter or contract, is a formal and binding contract. Mera Rubell and Nathaniel Rubell v. 1 Hotel Airport LLC, Case No. 3:19-cv-551-SMY (S.D. Ill. Feb. 27, 2020).
While in most cases a letter of intent is purely a preliminary step which creates no liability on the part of either party, courts have held that an agreement labeled a letter of intent may be enforceable if the parties so intended (and the court can discern the material terms), and depending on the surrounding circumstances, course of conduct and the relationship of the parties. Kimmell v. Schaefer (N.Y. Ct. App. 2007). In Rubell, the plaintiffs had entered into a business agreement with defendant to build a hotel. When plaintiffs sued alleging the defendant was in breach of the agreement, the defendant asserted that the parties had merely executed a letter of intent and that the agreement was not intended to be legally binding. The court disagreed and held that the agreement was legally binding. The court found the agreement satisfied the elements of a contract. Specifically, the agreement identified the parties, the commercial purpose of the agreement, the purchase price of the property, the property’s address, and its closing date. Id. at 2.
The Garb Agreement Use of the Garb Agreement makes clear that the parties intended for the MOU to be a legally binding contract. It includes all of the essential terms and conditions of an agreement including: The court continued that the plaintiffs became "bound to the agreement on execution. The MOU is now binding on the parties and constitutes an enforceable contract." Id. at 3.
Minimum Essential Terms Required A contract is enforceable if the parties manifested an intention to be bound by the agreement and agreed on (1) a reasonably certain basis for determining breach and (2) an appropriate remedy. Restatement (Second) of Contracts § 34 (1976). For an agreement to hold water, the parties must also agree on (1) parties (2) price (3) subject matter (4) quantity (5) quality (6) time and (7) place of payment. Id.
Language Matters A "MOU" can include, or exclude, any number of terms. A contract, however, must include a minimum number of critical terms, including party, subject matter, price, quantity, time, place and quality of performance. If these terms are absent, courts often look to extrinsic evidence in defining the terms. For this reason, if the MOU included the elements of a contract, it is likely enforceable even if it was called a MOU.
Contracts Enforceability
A contract is legally binding. It is a formal and legally enforceable agreement between two or more parties. It is considered to contain a promise or a set of promises that the other party will perform in the future.
For a contract to be legally enforceable, there must be mutual assent, or agreement between two or more parties, consideration, and legal purpose. Mutual assent can be implied or expressed, meaning it can be either orally communicated or in writing. Consideration means that something of value is being exchanged by the parties in the contract. The legal purpose of the contract means that the terms within it must not violate any laws.
If any of these requirements are missing, the contract will not be legally enforceable upon breach, if the terms of the contract are violated or not fulfilled in some way.
Use MOU
MOUs are appropriate to use when at the early stages of a transaction or relationship when the parties hope to enter into a more detailed or formal agreement in the future, and they want to lay out their general understanding of certain broad terms. An MOU is appropriate to use when the agreement is being used as a basis to negotiate an agreement with a third party on certain agreed upon terms. An MOU is also suitable to use to document an agreement in principle or a letter of intent where, for legitimate business reasons, the parties may have to keep the relationship informal until a later date.
In addition to its use in dealing with third parties, an MOU can be useful to outline the fundamental terms of an upcoming deal so that a party can avoid wasted costs and efforts which can arise when the agreement ultimately negotiated differs from the anticipated terms.
If the parties do eventually reach agreement on some detailed terms, it will then be appropriate to enter into a formal contract which will subsequently replace the MOU (subject to agreement by the parties on the deal points).
Use a Contract
When to Use a contract
While MOUs are appropriate in many situations, a contract is necessary (or at least very advisable) when legally binding commitments are required. If the purpose of the agreement includes defining legal rights and obligations of the parties, detailed descriptions of parties’ specific duties are expected, and the undertaking is costly and important enough to warrant legal enforceability, a contract should be used. For example, while an MOU may be adequate for a simple shared use of network printer, a comprehensive IT Services Agreement is clearly warranted for significant investments in servers, applications, back-ups, security and data processing. A contract should be used when an enforceable commitment to fund , even if incrementally, will be made, e.g., annual funding of a medical clinic, financial oversight of a national vaccine surveillance program, or a multi-year strategic partnership. MOUs are also inadvisable when federal, state or local law requires a written agreement (e.g., provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, the Federal Tort Claims Act (28 USC Section 1346(b) and 2671 et Seq.); obligations under the Uniformed Services Employment and Reemployment Rights Act (USERRA), 38 USC Section 4301 et Seq); the law of the state or territory from which the funds will come, e.g., the Uniform Commercial Code; and the law of states, territories and countries where money will be spent or services provided).
How MOU and Contract Differ
Enforceability: MOUs are generally unenforceable, simply indicating a party’s intent to agree to more formal terms at a later date, while contracts represent legally binding commitments that can impose legal obligations on all parties involved.
Intent: MOUs are typically entered into without any expectation from either party of forming a legal relationship, while a contract is formed with the intention to do so.
Scope: The scope of an MOU can be much narrower than that of a contract, which usually covers all aspects of an agreement between parties.
Formality: A contract requires a greater degree of formality in its formation than an MOU, which may be verbal or based on other informal arrangements.
Examples
• A group of artists may decide to collaborate on an installation for an exhibit. They may have two or three meetings before everything is finalized, the costs are estimated, and the exhibit location is selected. They would execute a memorandum of understanding to memorialize their plan, including who is responsible for what.
It is likely that the MOU will be detailed enough to address the items on the list above: (1) include the price ranges they are willing to work with; (2) develop a schedule; (3) draft an agreement; and (4) name a contact person from each group.
• A staffing agency approach a business about providing staff to cities in exchange for payment at the end of each month. They agree on the number of positions, the number of employees to be supplied, and the locations where the business is located. They will execute an agreement, detailing the above, and making sure that the obligations of both parties are clear. In this case, a detailed MOU serves as a contract. Even if it is not a legally binding document, the expectations are set and can help to control the relationship.
• A County Government and a Local Community Group agree to work together to encourage local businesses to participate in education programs. They draft an MOU which memorializes the agreement to produce, distribute or otherwise seek to encourage participation in education programs. If either of the parties decides not to participate, the other party can state that they acted on reasonable expectations that were created by the MOU.
These examples show that an MOU is often the first tool in reaching an agreement to provide a framework for intelligent discussions and the eventual drafting of a contract.
Advantages and Disadvantages of MOU and Contract
There are a few positives and negatives to using these documents. An MOU can be beneficial when you need a free tool to gain interest and support for a proposed project. Because you can usually draft an MOU quickly, it can also be appropriate if you want to initiate a conversation with a funding source or partner and gauge their interest in a project before committing time and money to the initiative. A signed MOU can also give you a better chance of getting grant funding, because an MOU indicates the commitment of partners in a potential project . On the flip side, because MOUs are counts as agreements, virtually any action or inaction, including the failure to apply for grant funding, could result in a breach of the agreement which may require you to dispute a claim or even take legal action.
A contract, on the other hand, has the advantage of being enforceable under the law. Because a memorandum of understanding does not have the same legal standing, if one party does not hold up its end of the deal, it can be more difficult to enforce than in the case of a contract. Contracts also treat each party equally, whereas the language in an MOU can be designed to benefit one party over the other.