Q&A #19 – What’s the difference between an MOU and a contract?

Question: My organization intends to carry out a joint educational program with another nonprofit. The two organizations will each do fundraising for the program and have various responsibilities with regard to the program’s operations. We know we should have something in writing with the other organization, but we want to keep it as simple as possible. Should we have an MOU or a contract, and what’s the difference?

Answer: In my experience, the concept of a “memorandum of understanding” or “MOU” is widely misunderstood in the nonprofit community. The same goes for similar terms like “memorandum of agreement” (MOA) and “memorandum of intent” (MOI).

Very often, what people mean when they use these terms is a short and simple contract. The word “contract” tends to conjure images of long, dense documents with incomprehensible legalese and archaic words like “WHEREAS,” “WHEREOF,” and “HEREIN.” Many people prefer to avoid these types of documents and instead have a simple MOU.

However, this is not an accurate description of what an MOU is. Technically speaking, an MOU is an introductory agreement laying out basic terms for a more formal agreement that the parties intend to sign later (the word “agreement” is interchangeable with “contract”). A true MOU is generally non-binding, as the parties are only exploring the possibility of entering into a binding contract.

This is rarely what people have in mind when they talk about an MOU. Usually they are envisioning a short binding document that sets forth in plain language what each side is obligated to do. This, in fact, is a contract.  

A contract arises when one party makes a written promise (for example, to pay money, to take an action, or to refrain from taking an action) in exchange for the written promise of another party. Contracts can arise in other ways as well, but this is the most common situation.

How you label the document is less important than ensuring that it clearly and accurately expresses the mutual intentions of the parties and protects against foreseeable risks. But I prefer to avoid the term “MOU” when a contract is what it intended, because this can lead organizations to be less careful and thorough in writing down and adhering to the important terms of the relationship.

Planning Tip – An unfortunate reality is that contracts are most important when there is a dispute between the parties. This is where a qualified attorney can be very helpful, as attorneys are trained to think about what could go wrong and address this in advance in the contract. It is almost always more cost-effective to pay an attorney to help you think this through upfront rather than deal with a messy situation after it has happened.

In your case, assuming you are past the exploratory phase, it certainly sounds like a contract would be a better fit than an MOU. A short and simple contract can be fine, but there are some very important details you will want to iron out, such as which party is responsible for managing the funds raised for the program, what happens if more money is raised than is needed for the program, and how ownership of the program’s intangible assets will be handled (such as the name of the program, the materials created for the program, and the program’s website, social media, and email lists).

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