In a recent seminar I was running I asked if everyone knew what an ‘MOU’ was. Everyone, as expected, told me that it was an acronym for memorandum of understanding – fine.
I then asked how and where they should be used. Nobody answered, blank faces all round. Bouncing this off of procurement professionals I network with, I was surprised to see the same blank look.
It’s as though this much-needed tool has been forgotten about or, worse, has fallen foul of rumours that then get taken as gospel by the organisation, the biggest of course being that they’re not legally binding.
I believe the private sector has a decent grasp of the use of MOU’s, but the public sector (including social enterprises spinning
out of the public sector) is a long way behind.
In my career, I’ve seen MOU’s used in place of contracts, and had confusion registered at my pointing out that if it contains the four pillars of offer, acceptance, intent to create legal relations and consideration then, regardless of what you call it, it is legally binding.
I set out to tackle this confusion once and for all. What then is an MOU and where should it be used?
An MOU is best employed in commercial transactions where the parties wish to document their intent to contract in the future. For example, two organisations intend to partner to bid for a contract. If they don’t win there was no contract anyway, but the MOU sets down the purpose, the intention and the details of how they will conduct themselves prior to winning the tender. Some parts (confidentiality, exclusivity, law and jurisdiction, and so on) may be legally binding and others not.
It really can be whatever you want it to be – if you want it to be legally binding, then state that intention in the wording.
If you don’t, just include the words ‘subject to contract’ – simple.
You can even use them to negotiate complex issues ahead of the main contract.
There’s just one final thing that seems the most important, but I’ve seen missed too many times to count: an MOU is not a contract. In the event your bid is successful, always follow up with a proper contract – wasn’t that the whole point in the first place?
☛ Gary Phillips is procurement manager at the Energy Saving Trust