Goodwill in a memorandum of understanding, what it means and what it does not do

When two Australian businesses want to explore a partnership without committing to a full contract, they often start with a memorandum of understanding (MOU). An MOU records the key points the parties have agreed so far: what each side wants, how they will work together, and what they hope the arrangement will become. The word "goodwill" appears in many MOUs, and it is easy to nod along without being sure what it actually means.

In an MOU, goodwill is the expectation that each party will deal with the other honestly and fairly as the arrangement develops. It is not a legal term with a fixed definition, and it is not something a court will enforce on its own. This article explains what goodwill means in an MOU, how it shows up in negotiation and drafting, where the legal line sits, and when a lawyer should review the document before you sign it.

What goodwill means in an MOU

Goodwill in this context is an underlying expectation rather than a rule. It is the assumption that both parties will act honestly, keep their word and follow through on what they have agreed, even before anything is legally binding. It implies ongoing trust between the parties and confidence that the other side will perform their side of the bargain.

This matters most in the early stages of a commercial relationship, when the parties are still testing whether a full partnership makes sense. An MOU is often the first formal document exchanged, and goodwill is the quality that lets negotiations proceed productively. Each party needs to believe that information shared in confidence will not be used against them, that positions stated in good faith will not later be twisted, and that time spent on the arrangement is not being wasted.

Goodwill is best understood as the commercial attitude the parties bring to the arrangement, not as a promise with legal teeth. Two businesses can sign an MOU and genuinely share goodwill, or they can sign one where one side is simply shopping for information. The document itself cannot manufacture goodwill, but it can record it, and that recording has real practical value.

Where goodwill shows up in practice

Goodwill operates in two places:

• At the negotiating table: goodwill determines which terms get raised and how they are handled. A party acting on goodwill will disclose relevant information rather than conceal it, will negotiate openly rather than in bad faith, and will raise problems early rather than let them fester. It is common, for example, for businesses negotiating an MOU to agree on how they will share information with each other. The expectation is that shared information will be used for the purpose of the arrangement and not for a side deal with a competitor.

• During performance: goodwill is what keeps the arrangement moving when the MOU itself is silent. An MOU rarely covers every eventuality, so the parties rely on each other to behave sensibly when circumstances change: a delay is communicated promptly, a change of plan is explained, and a genuine conflict of interest is declared rather than hidden.

None of this is enforceable in the way a contractual obligation is enforceable. But it shapes how the arrangement actually runs, which is why goodwill clauses appear in so many MOUs. A goodwill clause typically records that the parties will deal with each other in a spirit of cooperation and mutual benefit while the arrangement is being explored. It signals commercial intent to anyone reading the document, including a court, if a dispute later arises.

The legal line: goodwill is an expectation, not an obligation

The central point to understand about an MOU is that it is generally not legally binding. It records an intention to explore a deal, not an intention to complete one. Australian courts decide whether any agreement is binding by asking whether the parties intended to create legal relations, judged objectively from what a reasonable person would conclude from the document, its language and the surrounding circumstances. The High Court stated the modern approach in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95.

Language in an MOU such as "subject to contract", "not legally binding" or "intended only to record preliminary discussions" signals that the parties did not intend to be bound. Conversely, an MOU drafted with precise, promissory language and signed with formalities can, in some circumstances, be found to be a binding contract despite its name. The label on the document is not decisive; the intention is.

What this means for goodwill is straightforward: a goodwill clause does not make the MOU binding, and a failure to act in goodwill does not, on its own, give the other party a remedy. If one side simply walks away from a non-binding MOU, the other cannot sue for breach of "goodwill". What a party can protect are specific clauses drafted to be binding, such as confidentiality, exclusivity or break-fee provisions, which can survive even inside an otherwise non-binding MOU.

Goodwill should also be distinguished from good faith, which is a related but different idea. Australian courts, particularly in New South Wales, have recognised an implied duty of good faith in some commercial contracts, beginning with Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 and applied in cases such as Aiton v Transfield [1999] NSWSC 996. Whether such a duty is implied in any given contract remains a live question, and the High Court has not settled it for all contracts. In one significant area, however, good faith is an express legal obligation: the Franchising Code of Conduct (Cth) requires franchisors and franchisees to act in good faith in their dealings with each other, from pre-contractual negotiations through to termination, and the ACCC can take action where the obligation is breached.

A worked example: the coffee roaster and the café group

Hollow Oak Coffee, a Melbourne roaster, wants to supply a Brisbane café group with a signature blend and co-develop a customer loyalty app. Before committing to a joint venture agreement, the two businesses sign an MOU. It records the proposed blend, the target launch date and the plan to negotiate a full agreement. It includes a goodwill clause stating that the parties will cooperate openly and act in each other's interests while the arrangement is explored. Two clauses are expressly binding: a confidentiality clause covering Hollow Oak's recipe and pricing information, and a 90-day exclusivity clause preventing the café group from approaching other roasters during the negotiation.

Two months in, a national coffee company offers the café group a cheaper, larger supply deal. The exclusivity period has ended, and the MOU contains nothing else that would stop the café group from taking the offer. Under the law, the café group is free to walk away, because the MOU was never binding. Hollow Oak's goodwill clause gives it no claim against the group.

What goodwill actually did in this scenario was smaller and quieter. The café group's director phoned Hollow Oak the day the offer arrived, explained the situation and gave the roaster a genuine chance to match it. That honesty is goodwill in operation, and it is why the two businesses are still talking six months later, even though the deal changed shape. Goodwill does not hold an MOU together in a legal sense. It holds the relationship together so that the legal documents, when they come, are built on something real.

Common misconceptions about goodwill in an MOU

Three misconceptions about goodwill in an MOU come up again and again:

• "A goodwill clause makes the MOU legally binding": It does not. Bindingness turns on the parties' objective intention to create legal relations, not on the presence of a goodwill clause. If anything, a clause that frames the arrangement in terms of cooperation and exploration supports the opposite conclusion: that the parties were not committing to anything.

• "Goodwill and good faith are interchangeable, and both are enforceable": They are related but distinct. Goodwill in an MOU is a commercial expectation with no direct legal remedy. Good faith, by contrast, is a legal concept that courts can enforce, whether implied into a contract or imposed expressly, as it is on franchisors and franchisees under the Franchising Code of Conduct. The practical lesson is that "good faith" wording in an MOU can carry more legal weight than "goodwill" wording, and should be drafted with care.

• "Goodwill in an MOU is the same as the goodwill that comes with buying a business": It is a different meaning of the same word. In a business sale, goodwill is an identifiable intangible asset: the premium a buyer pays for a business above the fair value of its identifiable assets, reflecting its reputation, customer base and market position. Australian accounting standards treat that goodwill as an asset to be measured and recognised. None of that applies to the goodwill clause in an MOU, which concerns behaviour between parties, not value in a sale.

When a lawyer should review your MOU

A commercial lawyer adds value at two points in the MOU process. The first is drafting. A lawyer can make the binding and non-binding intentions of the document explicit, draft the carve-out clauses that will actually be enforceable, such as confidentiality, exclusivity and governing law, and check that "good faith" language does not accidentally create an obligation the parties did not intend. The second is review before signing. A party entering an MOU should understand precisely what it is and is not committing to, and a lawyer can explain where the risk sits, particularly where the MOU contains financial commitments, intellectual property or the promise of an exclusive negotiation period.

A lawyer is also the person to call if an MOU dispute arises. Whether a document labelled an MOU was in fact binding is a question a court ultimately decides, and the answer depends on the specific wording and circumstances. An assessment of that risk, before either side spends money on a dispute, is exactly the kind of work a commercial lawyer does.

The question to ask before you sign

Before you sign an MOU, ask yourself one question: if the other side walked away tomorrow, what would I actually have lost? The answer tells you what goodwill can and cannot do for you. If the only thing holding the arrangement together is the goodwill clause, you are relying on a relationship, not on the law, and the MOU will not protect you if that relationship sours. Goodwill sets the tone of the arrangement. The binding clauses, and the contract you negotiate afterwards, are what protect your position. Make sure you know which is which before you sign.