A potential partner has just emailed you a draft memorandum of understanding and asked you to sign it before any real contract work begins. Or you are on the other side of the table, about to send one out. Either way the document looks deceptively simple: a few pages of intentions, some bullet points about who will do what, and a signature block. The hard part is working out what those pages actually commit you to.
An MOU is a written record of the main commercial terms two or more parties have agreed on so far, before they commit to a formal contract. It does not, on its own, bind anyone to the deal itself. It sits between a handshake and a signed agreement: it shows the relationship is real, sets the framework for the work to come, and is meant to be replaced by the final contract. But the line between "not binding" and "binding" is thinner than most people think, and it is drawn by the clauses you include.
The clauses that do the work
MOUs have no statutory template. What matters is that the document does its job: recording your intentions without accidentally creating obligations you never meant to take on. These are the clauses to work through, roughly in the order they appear on the page.
Who the parties are, and why they are here
Every MOU should start by naming the parties in their full legal form. That means the registered company name and ACN, not the trading name, and the same care for any individual or trust involved. The most common drafting error here is a simple one: signing as a trading name, which can leave the wrong entity bound or none at all.
The background section should record what each side brings to the relationship and the history of the discussions so far. Pin down:
- Full legal names: each entity's registered name, ACN or ABN, and registered address.
- Who signs: the person authorised to sign on behalf of each entity.
- The background: what the parties have discussed, and what each hopes the relationship will achieve.
Purpose and scope
A good MOU states its purpose in one or two sentences: "the parties intend to explore a joint venture to develop and sell a new software product" tells everyone what the document is for. The drafting choice that matters is specificity. A purpose clause written so broadly that it could cover almost any future work gives an ambitious counterparty room to argue that later dealings fall within the MOU.
Keep the scope of the MOU itself separate from the scope of the deal you hope to sign. The MOU covers the exploration phase. The formal contract will cover the actual venture. Confusing the two is how a short intentions document starts to read like a performance contract.
The legal status clause: binding or not
This is the clause that decides everything else. Under Australian contract law, an agreement is only enforceable if the parties objectively intended to create legal relations, and that intention is assessed from the whole of the circumstances, not from what a document calls itself: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8. The classic authority on preliminary agreements is Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353, which describes three situations. The parties may intend to be bound immediately, with the formal contract merely restating their deal. Or they may have agreed on everything but intend not to be bound until the formal document is signed. Or they may intend not to be bound at all unless and until a formal contract is executed. Most MOUs are drafted to sit in the third category. The wording can pull them into the first two.
The drafting choice is to make the status explicit rather than implied. In practice that means:
- A non-binding statement: an express line that the MOU records intentions only and is not intended to create legal relations, except as stated.
- A carve-out clause: a list of the specific provisions that are intended to be binding, usually confidentiality and sometimes exclusivity or costs.
- A formal-contract condition: a statement that the parties will only be bound by a formal agreement signed by both of them.
The variant the other side will often push for is a clause that "records the parties' agreement" without any non-binding carve-out. That wording invites an argument that the MOU is a binding contract, whether or not the heading says "MOU". The trap runs deeper than the words: even with a clear non-binding clause, if the parties start performing, paying money or telling third parties the deal is done, a court can find a binding contract from conduct, or hold that one party is estopped from denying it. The document and your behaviour after signing have to match.
Roles, responsibilities and contributions
An MOU should set out what each party will actually do during the exploration phase: who runs the due diligence, who supplies the prototype, who introduces the customers, who pays for what. The level of detail matters. Describe contributions clearly enough to be useful, but not so precisely that the clause reads as a promise to perform the final deal. Work through:
- Activities: what each party will do while the relationship is being explored.
- Contributions: money, staff, premises, data or intellectual property each side will bring.
- Milestones: any dates or deliverables agreed so far, and what happens if they slip.
The trap is drafting obligations that look like firm commitments. A line such as "Party A will deliver the prototype by 1 March" is a promise, not an intention. If enough clauses read that way, a court is more likely to treat the whole document as a binding contract in the first Masters v Cameron category, and the "not binding" statement will struggle to save it.
How long the MOU runs, and how it ends
An MOU should have a term and a way out. The usual drafting choice is a fixed period, say 90 days, that can be extended by agreement, or a term that runs until it is replaced by a formal contract. Either way, set out:
- Expiry: the date the MOU ends, and what happens if negotiations are still running.
- Termination: that either party can end the MOU on written notice, and any notice period.
- Survival: which clauses continue after the MOU ends, almost always confidentiality and any costs already committed.
A termless MOU that is never formally killed off can be argued to have continued in force while the parties drifted apart, which supports a later claim that the relationship was still on foot. An expiry date forces a conscious decision: extend, sign the formal contract, or walk away.
Confidentiality
If the discussions will involve commercially sensitive information, the confidentiality clause is usually the one provision both sides genuinely want to be binding, and it should be named in the carve-out clause. The drafting choice is to define what counts as confidential information, and the exceptions to it, before anything is exchanged. Also decide:
- What is covered: documents, data, customer names, pricing, or anything disclosed in writing or in person.
- Exceptions: information already public, already known, or independently developed.
- Duration: how long the obligation lasts, and that it survives the end of the MOU.
The trap is a confidentiality clause that only runs while the MOU is on foot. The most sensitive information is usually exchanged after the MOU is signed and before the formal contract, which is exactly when the protection needs to bite, and it needs to survive if the deal falls over.
Disputes
MOUs often include a clause about how the parties will handle disagreement during the exploration phase, typically a commitment to meet, negotiate in good faith, or try mediation before walking away. A genuine good-faith negotiation obligation can be enforceable if it is drawn with enough certainty, as the New South Wales Court of Appeal confirmed in United Group Rail Services Ltd v Rail Corporation NSW [2009] NSWCA 177. The drafting choice is to make the process concrete rather than aspirational:
- Who meets: senior representatives of each party, named by role.
- When: within a set number of days of a dispute notice.
- What happens next: escalation to mediation or a decision to end the MOU.
Vague language such as "the parties will agree on a resolution" can be unenforceable for uncertainty, so keep the steps specific. And decide whether the dispute clause itself is one of the binding carve-outs. A dispute process that neither party is obliged to follow is a clause that does nothing.
Costs
Someone pays for the exploration phase: due diligence, drafting, travel, prototypes. The standard drafting choice is a simple statement that each party bears its own costs unless the MOU says otherwise. It is worth making that explicit because silence leaves room for a party to argue later that shared expenses were implicitly agreed. If the parties do intend to share costs, the clause should say what is shared, up to what amount, and who approves spending before it is incurred.
Signing the MOU
The final clause is execution: each party's authorised representative signs and dates the document, and states the capacity in which they sign. The trap is a signature from someone without authority. If the MOU is genuinely non-binding the risk is smaller, but a signature still evidences the terms of the document, and if any carve-out clauses are binding, the signatory's authority matters. Check who the company's constitution or the Corporations Act 2001 (Cth) says can bind it, and have the right person sign.
Optional clauses that can change the deal
These clauses are situational, and each one earns its place only when the trigger is present:
- Exclusivity or lock-out: worth including when one party is about to invest real time or money in due diligence and wants a guarantee the other side is not negotiating with competitors meanwhile. Make it binding and time-limited, because an open-ended lock-out can be attacked as an unreasonable restraint.
- Intellectual property: if the parties will create or exchange IP during the exploration phase, state who owns what and grant the licences needed to test the deal. Without it, ownership questions are resolved later, usually in a way neither party expected.
- Publicity and announcements: a clause requiring both parties to approve any public statement about the proposed deal. This stops one side announcing a partnership that does not yet exist.
- Governing law and jurisdiction: for deals across states or borders, state that Australian law applies and which state's courts will hear any dispute.
- Insurance and liability: if either party will handle the other's property, data or people during trials, allocate responsibility for loss or damage in advance.
When a lawyer should review your memorandum of understanding
The MOU is a small document, but it is where the commercial relationship is framed, and the review is usually quick. An Artificer Legal practitioner would start by reading the legal status clause, and if it is missing, adding it would be the first change. We would push back on clauses that read like firm promises to perform the final deal, blanket confidentiality obligations that bind you harder than the other side, and dispute clauses too vague to enforce. We would insist on an express non-binding statement with a named list of carve-outs, a defined term with a survival clause for confidentiality, and a signature block that matches each party's actual authority.
The order of negotiation matters too. Status first, because it decides what the rest of the document is. Then term, then confidentiality, then the money and roles. And the MOU should name what comes next: which formal agreement the parties intend to sign, and what will trigger the move from intention to contract. That keeps the document from becoming a permanent resting place for a deal that should have progressed.
Why a "not binding" line is not enough on its own
The single drafting choice that most often decides whether an MOU works is the legal status clause, but that choice is not complete until you also control what happens after signing. A court asked whether an MOU binds the parties will weigh the document's words against what the parties actually did, because intention is assessed objectively from all the circumstances. If the document says "not binding" but one side then pays money, starts work, or lets the other rely on the deal being done, the label can lose its meaning. The most valuable drafting decision is pairing an explicit non-binding statement with behaviour that matches it: no performance, no payments, and a clear, repeated position that the formal contract is the only document that binds.
The rest follows from that. An MOU records intentions and main terms while the deal is still being explored. Its core clauses are parties and background, purpose, legal status, roles and contributions, term and termination, confidentiality, disputes, costs and execution. The provisions you actually need to be binding, almost always confidentiality and sometimes exclusivity, should be carved out and named. Optional clauses for IP, publicity, governing law and liability earn their place when the deal involves those risks. And because the difference between binding and non-binding turns on wording and conduct rather than labels, a lawyer's review of a short document can be the cheapest protection in the whole deal.
If you are drafting or reviewing a memorandum of understanding, an Artificer Legal practitioner can work through the clauses with you, flag the wording that creates unintended obligations, and set up the path to your formal contract.