Keeping Things Casual – Avoiding an Unintentional Legal Relationship

Useful for: Business, Government, Local Government, Not for Profit Article looks at: Agreements that aren't legally binding

In Brief

  • A non-binding agreement is usually called a Memorandum of Understanding where there will be no further agreement later, or a Heads of Agreement, Commercial Terms Sheet, or Letter of Intent where the parties intend to create a legal relationship between them later. For this Article, the whole range has the name MOU.
  • Non-binding agreements are often used to express intent to carry out an undertaking between governments/government departments/non-government organisations, or other entities that need to set out the terms of their agreement but would not expect nor require that the obligations would be legally binding or that they would be enforceable in a court of law. They do not usually involve the exchange of money.
  • Naming a document ‘Memorandum of Understanding’ does not necessarily mean it isn’t binding. It is the substance of the document that will dictate whether the parties have formed a legal relationship – see the ‘Duck test’ below.
  • DO NOT use a MOU where commercial terms or legally binding obligations are immediately required, such as price and payment terms, confidentiality or privacy obligations, intellectual property rights, exclusions or limitations of liability, or releases and indemnities, unless you have these obligations separately set out in formal legal document/s.
  • It is possible for a document to be a “hybrid” of binding and non-binding terms, but these carry increased risk and should be drafted/advised on by a lawyer, whether they are contained inside the MOU or put in a separate “side” document. Really important things like releases, indemnities, guarantees and insurance obligations MUST be dealt with by separate agreement, or in some cases, deed.

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