Unlike a contract, a memorandum of agreement is not necessarily enforceable in court. Instead, it’s a written document that spells out the understanding between a subcontractor and a company regarding the responsibilities each agrees to accept on a specific project. A memorandum of agreement is a goodwill gesture that is used when two parties want to work together toward a common goal.
Clarify the Roles of Each Signer
The memorandum clarifies the duties and responsibilities of the subcontractor and the company. It becomes a contract when money is exchanged. The terms agreed on in the memorandum spell out the considerations and proposed collaboration between two parties and usually are used when two parties have the same goals and agendas. Memorandums of agreement often are made between community groups with similar constituents or between two parties sharing space in an office or building.
When Memorandums Become Actionable
One signer of the memorandum of agreement may be able to sue the other party if the terms of the memorandum have been breached and resulted in a loss. When the other party loses money or standing in the community, a memorandum of agreement can be used as proof of the other party’s failure to meet its obligations. This action can be taken even when no contract has been entered or money agreed to be paid. It can be used separately from a contract in legal disputes.
Memorandums that Assume Payment
When a subcontractor agrees to perform a service for a company under a memorandum of agreement, and no specified amount of money is included in the agreement, the company may still pay the subcontractor for services rendered. When the payments continue over a period of time and then suddenly stop, the subcontractor may rely on the memorandum of agreement to provide proof to a court that an agreement was in force, even if the terms are not specified. By paying regularly, the company created a custom that the subcontractor rightly came to rely on as common and expected.
As a Contract Addendum
Some companies insist that subcontractors sign a memorandum of agreement before assigning them a contract. The memorandum sets forth the purpose and scope of the job as well as defines the responsibilities of the subcontractor to do things such as follow government codes and regulations, hire only documented workers or remain in good standing in the community. The memorandum of agreement can include contact information for the company, when site visits can occur and what responsibilities directors of the company hold. It can include performance indicators and company goals the subcontractor agrees to meet.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."