Legal Guide

Is MOU A Contract? – Understanding A Thin Line of Difference

by Jui Naniwadekar · 3 min read

is a memorandum of understanding a contract

Introduction

You may have come across various types of agreements or indeed inked many either at work or while renting an apartment, or in starting or running a business. The significance of subscribing to fairly binding agreements cannot be ignored. Agreements not only guarantee that the terms and conditions outlined are enforced but can also be assessed fairly. The terms Memorandum of Understanding (MOU) and Contracts are over and over used interchangeably. Nevertheless, the two have differences.

What is an MOU?

  • This is a document that shows that two parties have agreed to cooperate to achieve an ideal. The purpose of MOUs is to show that the two parties have a shared understanding in written form.
  • MOUs are great for starting an honored and formal collaboration with other parties. They also contain little obligation and are oftentimes general or specific as necessitated.
  • Substantially, the parties involved in an MOU don’t intend to have a fairly enforceable agreement. As similar, these documents tend not to contain fairly binding terms. Still, the other party can’t have the agreement fairly executed if one party fails to fulfill an obligation as required in the MOU.
  • A memorandum of understanding, or MOU, is defined as an agreement between parties and can be bilateral (two) or multinational (further than two parties). The MOU serves as an expression of joint will between the parties in question and depicts the intention of a line of action commonly drawn.

When should you draw up an MOU?

An MOU is frequently the first step toward a formal agreement via a binding contract if you or your business is in the kick-off stages of a deal with another party. An MOU unarguably defines how the parties will work together and lays out each one’s expectations and liabilities. The aim is to achieve a combined understanding of the alliance, so you can move forward into an enforceable contract everyone feels confident about.

When to use an MOU?

There are several common reasons for using an MOU. 

  • You hold a business and plan to partner with another business
  • You have a small business and often partner with others.
  • Another business has asked about working with you and your business.
  • Your company and another business want to work on a specific ground plan together.

What is a Contract?

  • What is a Contract?

This is a mutual agreement where two or more parties concurrence to a legally binding agreement. A contract can only be legally abiding where two parties have entered into an agreement lawfully enforceable. The purpose of a contract is to validate the scores of both parties, distribute and minimize the danger if one party fails to perform as per the contract terms.

A lawful contract must have the following –

  1. An offer
  2. Acceptance
  3. It must be made with the will to produce a legal relationship
  4. It must have consideration from both parties. Still, the other party can have it fairly executed if one party fails to fulfill the contract terms.

Is MOU a Contract?

  • Points of Similarities between MOU and Contract

Though an MOU and a Contract are not one and the same, it still has some similarities. Given are some of them-

  1. Involvement of two or more parties
  2. Involved parties must agree on the same thing
  3. MOU and Contract both have an offer that must be accepted by the other party
  • Points of difference between MOU and Contract

MOU is a document that shows that two parties have agreed to cooperate to achieve an aim. It isn’t enforceable at law and aims to show that the two parties have a collective understanding in a written form. On the other hand, a contract is a collective agreement where two or further parties concurrence to a fairly binding agreement. It’s fairly binding and aims to validate the scores of both parties distribute and reduce the trouble if one party fails to perform as per the terms of the contract.

1) Definition

MOU is a document that intends to show that two or more parties ( as the case may be) have agreed to cooperate with each other and achieve a common aim.

On the other hand, a contract is a mutual agreement enforceable by law. It is an agreement where two or more persons have willingly consented to a legally binding relationship arising out of the agreement.

2) Enforceability

As stated above, a contract is a legally enforceable agreement. However, an MOU is not a legally enforceable agreement. 

3) Object

The object of a contract is to give rise to a legal reciprocating relationship. It also aims at documenting the obligations of parties entering into a contract. It also distributes and reduces the risk of failure to perform the contract as agreed upon by the parties. Whereas an MOU has the object of showing that two parties have agreed to a mutual understanding in a written form.

Advantages of entering into an MOU

  1. Though an MOU is not a Contract, it initiates the establishment and building of a mutual connection between the parties. It also enables clarity of goals and aims for each party.
  2. An MOU, not being a contract, Finalizing MOU allows the parties to go ahead with the paper trail or to keep a sound record of the negotiations, which leads to the finalization of the MOU.
  3. An MOU, not a contract, reduces the level of uncertainty and ambiguity between the parties involved, as the MOU highlights the expectations and, commitments, responsibilities and also reduces the risk of disagreements in the future.
  4. An MOU is not a contract, as it is an agreement that paves the way for a future contract between the parties. It provides an easy exit to the party who thinks that goals and objectives or any terms and conditions are not easily met and can also end an agreement.

Disadvantages of entering into an MOU

The only disadvantage an MOU has is a lack of legal bindingness. Which allows another party to take an easy exit from an MOU agreement or not perform the things agreed in the MOU agreement without facing the legal consequences. MOU is not a contract as the Contract does not allow the person to run away from his responsibilities and leave the other party helpless. The contract is a legally binding document, a breach of which calls for legal action against the defaulter. Seek legal advice from an expert.

Conclusion

An MOU is a document that intends to show that two or more parties have agreed to cooperate to achieve a goal. It isn’t legally enforceable and aims to show that the two parties have a combined understanding in a written form. On the other hand, a contract is a combined agreement where two or further parties give clearance to a legally binding agreement.

It’s fairly binding and aims to establish the liabilities of both parties distribute and reduce the threat if one party fails to perform as per the terms of a contract.

Entering into an MOU before entering into a Contract is always a wise step to take. One must seek advice and get the MOU agreement drafted by an expert lawyer before entering into a contract.

Jui Naniwadekar

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Jui Naniwadekar

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