Memorandum of understanding clauses, what should bind and what shouldn't

You have just been handed a memorandum of understanding (MOU) to sign, or you are about to send one to the other side. It looks short and friendly, a page or two of intentions and good faith, but the question that matters is which of those lines will be enforceable if the collaboration sours.

An MOU is a written record of the high-level intentions, goals and expectations of two or more parties planning to work together. It does not displace a binding contract: it sits in front of one, capturing the big picture in plain English while the commercial terms are still being worked out. In Australia it is the document most often used at the start of a partnership, joint venture, supply arrangement or shared project. The whole game is deciding which clauses are binding and which are not.

The clauses that do the work

An MOU is only as strong as its clauses. What follows is the order you will typically see in a well-drafted Australian MOU, with the drafting choice and the trap for each.

Parties and the background

This clause names the exact legal entities signing the MOU, with their ABNs and addresses, and records in a short background paragraph why the collaboration is happening. The drafting choice that matters most is using the full legal name of each entity rather than a trading name. The trap is signing with the wrong entity, which can bind a company you did not intend, or no one at all:

• the registered company or business name, not the brand
• the ABN matches the entity named
• the person signing has authority to bind that entity

What the collaboration is for

Objectives and scope set out what the parties are trying to achieve together and, just as importantly, what the collaboration does not include. This clause is normally non-binding, a statement of intent rather than an enforceable promise. The drafting choice is being specific enough to be useful while staying loose enough not to commit. The trap is scope creep, where a broad phrase such as "the parties will explore opportunities in the region" is later read as an agreement to pursue all of them. A clean scope clause lists inclusions and exclusions side by side.

Who does what and how decisions get made

Roles, contributions and governance record what each party will bring, whether expertise, data, funding or facilities, and how the relationship will run day to day: who the project leads are, how decisions get made, and how often the parties review progress. Keep this clause non-binding. The drafting choice that matters is naming a person rather than just a role, so there is no argument later about who was meant to be in the room. The trap is silent governance, where neither party knows who can commit the other side's resources.

Timelines and milestones

Indicative timeframes, phases and milestone reviews give the collaboration momentum without locking either party in. State that the dates are indicative and subject to change, and record how changes will be discussed and agreed. The trap is a timeline drafted as a firm commitment, which converts a planning document into something a court could read as a binding schedule.

Confidentiality, the binding heart of the MOU

If the parties will exchange commercially sensitive information during the exploratory phase, confidentiality is the clause that must be binding. An equitable duty of confidence may protect some information anyway, but a clear contractual clause gives you a defined scope and a direct remedy. The drafting choice that matters most is making the carve-outs explicit, for example that the obligation survives the MOU and does not apply to information that is already public or independently developed. The trap, and the most common misdraft in Australian MOUs, is leaving confidentiality in the non-binding section, which guts the protection at exactly the moment it is needed. If the information is genuinely sensitive, a standalone non-disclosure agreement alongside the MOU is often the cleaner option.

Who owns the ideas

Intellectual property needs to be dealt with twice: what happens to IP each party brings in, and what happens to new IP created during the collaboration. The standard approach is binding as stated: each party retains ownership of its pre-existing IP, and ownership and licensing of any new IP will be negotiated in the future binding agreement. Until that agreement is signed, no transfer of ownership is intended. The drafting choice that matters is saying something about new IP, even if it is only that ownership is reserved for negotiation. The trap is silence, which leaves a prototype, dataset or process created during the exploratory phase with no agreed owner when the relationship ends.

Who pays for what

A costs clause answers the question of who funds the exploration. The default position, and the one to state in binding terms, is that each party bears its own costs unless otherwise agreed in writing. The drafting choice that matters is defining what "costs" covers, such as travel, prototypes and research. The trap is open-ended language like "the parties will share costs as they arise", which invites a dispute over every invoice.

The no-partnership clause

A short binding clause stating that the MOU does not create a partnership, joint venture, agency, fiduciary or employment relationship. It matters because Australian law can infer a partnership from conduct. Under s 1(1) of the Partnership Act 1892 (NSW), partnership is the relation between persons carrying on a business in common with a view of profit, and while s 2 of that Act says sharing gross returns does not of itself create a partnership, the question is ultimately one of fact and degree. The clause is not a guarantee, because courts look at what the parties actually did, but it is strong evidence of intention and materially reduces the risk of being treated as partners with joint liability. Every state and territory has its own Partnership Act in similar terms.

Which clauses bind and which don't

The legal status clause is the mechanism that makes an MOU workable: it lists which provisions are statements of intent only and which are intended to be legally binding. Australian courts assess whether the parties intended to create legal relations objectively, looking at what a reasonable person in the parties' position would have understood, as the High Court confirmed in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95. Contract formation still turns on the fundamentals, offer, acceptance, consideration, intention and certainty of terms, so a clause that merely says "this MOU is not binding" may not be enough if the rest of the document is drafted in obligatory language. The drafting choice that matters is using two short lists, one for binding provisions and one for non-binding, and keeping obligation-heavy words like "shall" and "must" out of the non-binding sections.

How long the MOU lasts

Term, variation and termination state when the MOU starts, when it ends, how it can be extended, and how either party can end it early, usually on a set period of written notice. This clause is binding. The drafting choice that matters is giving the MOU a natural end date that aligns with the plan to move to a binding contract. The trap is an MOU with no end date, which lingers indefinitely and can be dusted off years later by a party claiming the other side is still bound to its stated intentions.

Governing law and disputes

A binding clause choosing the law that governs the MOU, usually the law of the state or territory where the lead party is based, plus a short dispute process, typically good-faith discussions followed by mediation if the dispute is not resolved within a set period. The drafting choice that matters is picking a single governing law, because an MOU involving parties in different states can otherwise attract competing arguments. The trap is a dispute clause that is itself vague, such as "the parties will try to resolve disputes amicably", which gives a court nothing to enforce.

The road to a binding contract

A well-drafted MOU ends with next steps: who will draft the binding agreement, what approvals are needed, and the target date for signing. This clause turns the MOU into momentum rather than a dead end. Keep it non-binding, but make it concrete enough that the parties know exactly what comes next.

Optional clauses worth adding when they fit

Not every MOU needs these, but each earns its place in specific circumstances:

• Exclusivity: include it when you do not want the other party negotiating the same deal with a competitor while you explore together.
• Non-solicitation: worth adding when either side will introduce staff or customers to the collaboration and you want protection if it falls over.
• Publicity and announcements: control who can talk about the proposed collaboration, and when, which matters in listed-company or high-profile contexts.
• Data and privacy handling: if personal information will be shared, set out how it will be handled, because handling personal information can trigger obligations under the Privacy Act 1988 (Cth).
• Deadlock and escalation: for joint ventures or 50/50 arrangements, a mechanism for what happens when the parties cannot agree, such as escalation to senior executives before termination.

How an Artificer Legal lawyer would review your MOU

An MOU looks simple, which is exactly why it pays to have one reviewed before you sign or send it. A practitioner at Artificer Legal would start with the legal status clause and work through the document in the order the risk sits. First, which provisions are binding and whether the drafting matches that intention. Second, the scope of confidentiality, including whether it survives the MOU and covers the information you will actually share. Third, the IP provisions, to make sure pre-existing IP stays put and new IP is reserved for negotiation. Fourth, the no-partnership clause, and whether your conduct during the exploratory phase could undermine it. Finally, the mechanics: term, termination and dispute resolution.

We would push back on a confidentiality clause with no carve-outs, an IP clause that says nothing about new IP, and a legal status clause that contradicts the rest of the document. If you are early in a relationship and nothing sensitive has been exchanged, we might tell you the MOU is unnecessary and you can move straight to a contract. If you are about to share confidential information or commit resources, we would draft the MOU with the binding carve-outs in place from day one.

The clause that decides whether your MOU holds up

If there is one drafting choice that separates an MOU that works from one that does not, it is the legal status clause. It is the most misdrafted provision in the document: drafted carelessly, it can make the whole MOU binding when no one intended that, or leave confidentiality and IP floating in the non-binding ether. Courts decide enforceability by objective intention, so the document itself has to be unambiguous. A short, explicit clause listing exactly which provisions bind and which do not is worth more than any other drafting in the document, because it decides who wins if the collaboration falls apart.

The rest follows from it. Keep the non-binding sections as clear statements of intent, make confidentiality, IP, costs, the no-partnership clause, term and governing law binding, add the optional clauses your circumstances call for, and use the MOU to set a timetable for the binding contract that will eventually do the real work. That is the difference between a memorandum of understanding that keeps a deal moving and one that becomes evidence in the dispute that ends it.