Introduction
In Indonesian civil law practice, the terms Memorandum of Understanding (MoU) and contract/agreement are often used interchangeably, although both have distinct legal positions and functions. An MoU generally contains only the parties’ initial understanding before being formalized into a binding agreement, whereas a contract or agreement under the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata or KUHPerdata) constitutes a legal act that creates enforceable rights and obligations. Understanding this distinction is crucial to avoid confusion in application, particularly regarding binding force and resulting legal consequences.
What is a Memorandum of Understanding (MoU)?
The term Memorandum of Understanding (MoU) consists of two words. Memorandum refers to the initial basis or foundation for drafting a formal contract in the future. Meanwhile, Understanding refers to an indirect statement of consent in relation to another agreement, either oral or written. According to Ricardo Simanjuntak (2011:45), an MoU is a form of preliminary agreement expressing steps towards achieving mutual understanding between parties before executing a contract. Ricardo Simanjuntak (2006:37) further explains that an MoU document is not legally binding, and in order to be binding it must be followed by the drafting and signing of a formal agreement by the parties.
From this definition, it can be concluded that a Memorandum of Understanding (MoU) is essentially a written statement of mutual understanding or preliminary agreement, which outlines the initial consensus of parties intending to enter into a contract or other agreement.
Characteristics of an MoU
An MoU is generally regarded as an initial understanding before a more legally binding agreement is drafted. It has characteristics that distinguish it from a contract, namely being simpler in nature, not always legally enforceable, but serving as an important basis for future cooperation.
The characteristics of an MoU are as follows:
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Its content is concise, often only one page long;
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It only covers essential matters;
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It is preliminary in nature, to be followed by a more detailed agreement;
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It has a specific time frame (e.g., one month, six months, or one year). If within that time frame no further agreement is executed, the MoU lapses, unless extended by the parties;
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It is usually made in the form of a private agreement (perjanjian di bawah tangan); and
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It generally does not impose a binding obligation on the parties to proceed with a more detailed agreement, since it is reasonably possible that obstacles may prevent the execution of such a detailed contract.
Difference Between MoU and Contract/Agreement
In both legal and business practice, MoUs and contracts/agreements are often used, but they have different positions and legal consequences. An MoU is typically viewed as a preliminary document containing initial understanding without creating fully binding legal obligations, while a contract/agreement as regulated in the Civil Code is a source of obligation that creates enforceable rights and duties.
MoUs are not formally recognized under Indonesian conventional law but are often used in practice as pre-contracts or preliminary agreements. By contrast, a contract is expressly defined in Article 1313 of the Civil Code (Burgerlijk Wetboek): “An agreement is an act by which one or more persons bind themselves to one or more other persons.”
The fundamental distinction is that an MoU is not a binding legal relationship but rather a written statement of principle understanding between the parties.
Legal Force of an MoU and Contract/Agreement
As explained, an MoU is not recognized in Indonesian conventional law and does not itself create a legal relationship. In contrast, a contract is a legal act whereby one or more persons bind themselves to others. Article 1338 paragraph (1) of the Civil Code states: “All agreements made legally shall apply as law for those who make them.”
For a contract/agreement to be valid, it must fulfill the requirements set forth in Article 1320 of the Civil Code:
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The consent of the parties binding themselves;
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The capacity to enter into a legal obligation;
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A specific subject matter; and
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A lawful cause.
As an MoU only represents a written note of preliminary understanding by parties planning to enter into a contract or other agreement, it does not satisfy the validity requirements of a contract under Article 1320 of the Civil Code.
Conclusion
Memoranda of Understanding (MoUs) and contracts/agreements hold different legal positions in Indonesian civil law practice. An MoU is essentially a preliminary, simple note of understanding that does not create fully binding legal obligations, functioning mainly as a foundation or pre-contract. By contrast, a contract/agreement under the Civil Code is a legal act that establishes rights and obligations enforceable under law, provided it fulfills the validity requirements of Article 1320 of the Civil Code. It is therefore important for parties to distinguish between an MoU and a contract to avoid misunderstandings regarding their legal force and consequences.
References:
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Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata)
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Ricardo Simanjuntak, Hukum Kontrak Teknik Perancangan Kontrak Bisnis, Kontan Publishing, 2011
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Ricardo Simanjuntak, Teknik Perancangan Kontrak Bisnis, Mingguan Ekonomi & Bisnis Kontan, 2006