Updated: Sep 11
What is the difference between these two documents in Washington State, and why does it matter?
What is the difference?
A memorandum of agreement is like any other contract, in that it creates legally binding obligations for both parties. If two parties don't intend to be bound by the document's terms at a particular stage of negotiation, they may execute a memorandum of understanding, which describes their intent to enter into a binding contract at some future date. The memorandum of understanding lays out some of the terms that the parties hope will form part of a legally binding contract, but the parties still have other terms left to negotiate. Therefore, the MOU is not a completed contract and not binding on either party. Washington courts will not enforce an MOU against any party where there is no meeting of the minds on numerous material terms.
A memorandum by any other name...
A document expressing an understanding, rather than a firm, legally binding commitment is often referred to as a memorandum of understanding, but the name is irrelevant. Instead of MOU, parties may call this document a "preliminary agreement," "agreement to agree," "letter of intent," or "commitment letter." Regardless of what it's called–even if it's called a "contract"–if the document is missing material terms, it's not binding on either party.
Why is this important for a WA business?
First, it's important to know what you're getting into. One party will often sign another party's "memorandum of understanding," thinking that what they've received is a legally binding commitment. Then when it's too late, they find out that a court won't enforce the terms against the other party.
Second, a business may incur costs in reliance on the terms the MOU. Generally, one may recover damages when they have reasonably relied on a promise to their detriment, even if the promise did not amount to a legally binding contract. However, in the context of ongoing negotiations with only an MOU in place, Washington courts may find that incurred costs are not recoverable because they were merely expenses incurred in contemplation of making an agreement.
If you have more questions about memorandums of understanding in Vancouver, Washington, or about contracts in general, please contact In-house | On-site to speak with a Vancouver, WA attorney.