A Memorandum of Understanding (MOU) can be an effective and flexible tool for documenting the common intent of two or more government parties or between government and non-government parties.

Use of Memoranda of Understanding by Government

Summary : A Memorandum of Understanding (MOU) can be an effective and flexible tool for documenting the common intent of two or more government parties or between government and non-government parties. However, careful consideration needs to be given to whether an MOU is the most appropriate tool on each occasion and care needs to be taken in drafting an MOU to avoid unintended legal consequences and adverse practical implications. In this newsletter we explore when to use an MOU rather than a contract, and issues to consider when drafting the MOU.

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Definition

Functions of MOUs

A Nasty Surprise: Are MOUs Legally Binding?

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Definition

An MOU is a document that records the common intent of two or more parties where the parties do not wish to assume legally binding obligations. An MOU is usually less complex and less detailed than a contract, but provides a framework and set of principles to guide the parties in undertaking a project or working arrangement.1

Functions of MOUs

MOUs can assist government departments and agencies clarify roles and responsibilities and manage expectations associated with projects and endeavours that are to be undertaken with other government parties or non-government parties. Non-binding MOUs may be terminated without legal consequence in some circumstances. This flexibility is considered to be a significant advantage for government.

MOUs between Government Parties

MOUs are helpful when two or more government parties wish to collaborate on a particular project or working arrangement. In the vast majority of cases, the parties will be unable to, or legally prohibited from, entering into a legally binding contractual arrangement with each other, because two different arms of the same legal entity are unable to contract.2

There are numerous examples of the appropriate use of MOUs between government agencies. The Department of Justice regularly uses MOUs to effectively document the arrangements between government parties in relation to service delivery. An example is the MOU between the Department of Justice, the Department of Human Services and Victoria Legal Aid for the purpose of providing services as part of the Family Violence Court Division. Victoria Police frequently uses MOUs with other government agencies to support its law enforcement functions, including with other jurisdictions for cross-border operations.

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MOUs between Government and Private Parties

Government departments or agencies may wish to enter into an MOU with a private party in circumstances where a complex development project is being undertaken and the detail for the project is yet to be fully determined.

MOUs for this purpose describe the key components of the project, the roles and relationships of the parties in relation to the project, the tenure arrangements and the conditions precedent for the project to proceed.

Government may also enter into an MOU with a private party as an interim measure to progress a project pending settlement of the terms of a formal contract. In these circumstances, the document may contain a clause to the effect that the parties will continue to negotiate in good faith to finalise a binding agreement between them. Traditionally, the common law has not regarded such clauses as legally binding,3 and the law in this area remains unsettled.4 Therefore, clauses containing the requirement to negotiate in good faith may continue to be used in MOUs, but the parties need to be aware that such clauses may not be held to be legally binding by the courts in the event of a dispute.

MOUs between Government and Not for Profit Organisations

MOUs are also frequently signed between government and not for profit organisations in relation to the funding arrangements and service delivery of charity or community education programs.

MOUs referred in or required by Legislation

Some MOUs are used for certain purposes or projects because their use is legislatively permitted or mandated. Acts which authorise the use of a non-binding agreement such as an MOU include the Emergency Services Telecommunications Act 2004 and the Australian Securities and Investment Commission Act 2001 (Cth). The Witness Protection Act 1991 provides that an MOU must be entered into between a witness and the Chief Commissioner of Police before the witness can be included as a participant in the Witness Protection Program. The Act also mandates the specific matters that must be included in the MOU5 and the circumstances in which the parties can terminate the MOU.6

When considering the effectiveness of an MOU for a particular project it is important that all relevant legislation is analysed to check whether any legislative requirements apply to the document. If there is an applicable legislative requirement that specific matters be included in an MOU then the MOU may be examined as part of any future legal action.7

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A Nasty Surprise: Are MOUs Legally Binding?

 

Frequently, government agencies enter into an MOU with the implicit expectation of having a legal remedy in the event of a breach by the other party. It is very important to be aware that it is usual practice within government for MOUs to be non-binding. As a consequence, the legal remedies that apply in the event of non-performance or a breach by a party to a non-binding MOU will be non-existent or very limited.

At the time that an MOU is being prepared it is critical for the parties to agree on whether or not they intend the document to impose legally binding obligations. If the parties do intend to be legally bound, a contract might be preferable (although, as discussed earlier, when there are two or more government parties involved, it may not be legally possible for the parties to contract with each other). Otherwise, the MOU should state explicitly which clauses are intended to be binding (see below).

Under what circumstances will an MOU be considered binding?

The question of whether or not an MOU is legally binding is a question involving principles of contract law. In general, a document is considered to be binding if there is an offer, acceptance, an intention to be legally bound, and consideration.8

The intention of the parties at the time of signing the MOU is crucial to determining whether or not the document is binding. Therefore, if the parties wish the MOU or individual clauses in the MOU to be legally binding, they should state this intention clearly and unambiguously in the MOU. If the intention of the parties is unclear, but the terms of the MOU are clearly defined and the MOU is supported by consideration, there is a strong presumption at law that the parties did intend to create a legally binding contract,9 despite the document being called an MOU.

No intention to create Legal Relations

If it is the intention of the parties that the MOU be non-binding, the MOU should provide explicitly that the parties do not intend to enter into a legally binding arrangement, but nevertheless intend to comply with the framework provided by the document.

Sometimes an MOU will need to contain some legally binding clauses, despite the intention of the parties for the majority of the document to be non-binding. Clauses which the parties may wish to be legally binding include confidentiality and privacy provisions.

Despite expression of this intention, disputes can still arise as to whether other clauses in the MOU are also intended to be legally binding. These disputes can arise from the use of language in the MOU which conveys a binding intention. Use of phrases such as “the parties must” or “the parties will” tend to convey such an intention. Hence, if the parties intend the MOU to be non-binding, the use of such expressions should be strictly avoided, while expressions such as “the parties intend” should be used instead.


When should an MOU be binding?

In certain circumstances, the parties may intend that the entire MOU be legally binding; however in most of these cases, a contract will be a more appropriate document, particularly if the subject matter involves the provision of funds from government to a party that is not a government agency.

For an MOU to have legal effect, its clauses must be sufficiently clear and certain.  Expressions such as “usual terms” and “fair and equitable price” should be avoided, because courts can refuse to give them legal meaning, with the result that the MOUs in which they appear will not give rise to legally binding obligations.10


Breaches of Legislative Requirements

Where an MOU’s contents are mandated by legislation, a breach of the MOU may be an offence under that legislation and could result in serious legal consequences or sanctions for the party in breach. 11

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For further information

The Victorian Government Solicitor's Office has extensive experience in preparing effective MOUs. For further advice on any of the issues in this Newsletter contact:

Sue Nolen on 8684 0402
Assistant Victorian Government Solicitor

Kirsty McIntyre on 9247 6797
Assistant Victorian Government Solicitor

Sam Funnell on 8684 0409; or 9247 6791
Managing Principal Solicitor

The VGSO is the primary source of legal services to the Victorian State Government and its statutory authorities, providing strategic advice and practical legal solutions.

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1 The use of an MOU between two government parties is sometimes referred to as an ‘Intergovernmental Agreement’; although that term is more appropriate for Heads of Government level agreements.
2 Seddon, Nicholas. Government Contracts, Federal, State and Local, 2004, Federation Press, Chapter 2.
3 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotel) Pty Ltd [1975] 1 WLR 297.
4 See: Coal Cliff Collieries v Sijehama [1991] 24 NSWLR 1.
5 Section 5, Witness Protection Act 2001 (Vic).
6 Section 16, Witness Protection Act 2001 (Vic).
7 Applicants A1 and A2 v Director of OPI and Ors [2007] VSC 66.
8 J W Carter, Carter on Contract, 2002 LexisNexis Butterworths, Chapter 2.
9 Edwards v Skyways [1964] 1 WLR 349.
10 LMI v Baulerstone [2001] NSWSC 886.
11 An example of this is in s16(2)(a) of the Witness Protection Act 1991 (Vic).