Commercial Law
Client Newsletter
Memoranda of Understanding
June 2008
Use of Memoranda of
Understanding by
Government
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
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 nongovernment 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.
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.
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 referenced 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
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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
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 nonperformance or a breach by a party to a nonbinding 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
Page 3
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
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, please 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.
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).