Nonprofit MOUs vs. Legal Contracts

​It’s not unusual for nonprofit organizations to partner or collaborate with other organizations to accomplish a mutual purpose. Often, our nonprofit clients prefer to document these relationships with an MOU or Memorandum of Understanding. But just what is an MOU, and how is it different from a contract?

A contract is simply a legally binding agreement between two or more parties. In order to be legally binding, a contract must meet certain requirements:

• A valid offer: One party offers to do (or refrain from doing) something. In the nonprofit context, one organization might offer to collaborate with another on a project that both organizations are interested in. Or an established organization might offer to serve as a fiscal sponsor to a newer organization.
• Acceptance of that offer: It should go without saying, but a contract cannot be formed unless the parties intend to be legally bound by the contract. If your organization offers to collaborate with another nonprofit, that other nonprofit has to accept the offer.
• Consideration: Consideration is the value that each party is given in the contract. While this is often money, it can also be services, property, a license (or permission) to use intellectual property, a promise to do something, or even the promise to refrain from doing something you otherwise would have the right to do. Each party has to give some consideration. Otherwise, you only have a gift from one party, and a promise to “gift” something is not legally enforceable.
• Capacity: Each party must have the legal capacity to enter into a contract. For example, minors typically cannot sign contracts. In the case of nonprofit organization, the bylaws will often dictate what is required for the organization to officially adopt an action and who is authorized to sign contracts on behalf of the organization.

In the nonprofit context, many MOUs will meet these standards and be legally binding, regardless of whether you title the document a “Memorandum of Understanding” or a “____ Agreement.” The key is not how the document is titled, but whether the parties intended to be legally bound by the terms of the document.

Other times, the MOU will be too vague to show the necessary intent to be bound. An understanding that two organizations will collaborate on a project does not tell us anything what each organization is actually promising to do. In this situation, an MOU might serve as a basic framework for further discussions. Or the organizations involved may simply want to test the waters without creating any binding obligations. The MOU might even expressly state that the parties do not intend to be legally bound.
Like any other business relationship, it’s important for nonprofit organizations to recognize the purpose of the relationship and draft any relevant documents accordingly. Otherwise, nonprofits may find themselves in costly disputes because of misunderstandings with their partner organizations.

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Have questions about your organization’s MOUs? Schedule a consultation with our nonprofit attorneys.

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