When engaging a service provider, businesses that value security may prefer to test the waters with a Memorandum of Understanding (MOU) instead of jumping straight into a full contract.
This is especially true when the scope of work is still under discussion.
An MOU can help frame the working relationship, clarify expectations, and safeguard sensitive information while a definitive Service Agreement is being prepared.
When is an MOU useful in a service arrangement?
We typically see MOUs being used in services engagements where:
- parties agree to work together but are still refining commercial terms
- deliverables or proposals will be exchanged before signing a contract
- there is a need to signal commitment or exclusivity during discussions, and
- internal approvals or board sign offs are pending but both sides want to move forward in good faith
In these situations, an MOU provides a generally non-binding document that can also include certain binding clauses that records the mutual understanding.
Key inclusions in a service-based MOU
A typical services-related MOU will usually address the following key areas:
| Clause | Purpose |
| 1. Purpose | Provides a brief overview of the intended engagement, such as social media marketing or outsourced payroll services. |
| 2. Outline of Services | Summarises the key areas under discussion that may be included in the final agreement. |
| 3. Roles and Responsibilities | Defines the duties and obligations of each party during the engagement period. |
| 4. Non-binding Nature | States that the MOU is not legally binding, except for specific clauses such as confidentiality. |
| 5. Confidentiality | Prohibits the disclosure of sensitive information such as marketing plans, pricing, or internal processes. This clause is typically legally binding. |
| 6. Duration | Specifies the time period the MOU will remain in effect. |
In addition, parties may add the following two optional clauses if it fits their use case:
1. Exclusivity
If parties are expected to halt discussions with competitors while talks are ongoing.
2. Ownership of work-in-progress
In some service arrangements, parties may share early drafts or conceptual work. An MOU can help address who owns what if the deal doesn’t proceed.
Of course, each MOU should reflect the specifics of the deal, so some parties may choose to be bound by additional clauses or omit what would usually be considered standard inclusions.
Does it create a binding contract?
Generally, no, an MOU for services is not legally binding as a whole.
Issues with enforceability are almost always due to improperly drafted documents that courts may interpret as partially or fully binding, particularly if it includes commitments resembling contractual terms (like deliverables and payment).
To avoid this, we always advise clients to include a clear non-binding clause, and to keep operational or commercial details at a high level until the final agreement is signed.
Should you use an MOU or skip to a contract?
Without knowing your specific situation, here is our general advice:
- MOU if still working out scope, recording early discussions, or sharing confidential information with basic protections
- proceed with a Service Agreement once the scope, timeline, and commercial terms are finalised, and both sides are ready to commit
We often prepare both in stages; an MOU first, followed by the final agreement once commercial terms are locked in.
In fact, there is a third document called a Memorandum of Agreement (MOA) used in between an MOU and a contract, and to see how they work together, see our guide to MOUs vs MOAs vs Contracts.
Final thoughts
Though an MOU isn’t legally required, when there is a need to manage expectations and ease the path to a formal contract, it becomes close to indispensable.
The key is to keep it practical, clear, and tailored to the services being discussed, ideally with a non-binding clause to ensure both parties are protected.
