Memorandum of Understanding (MOU)

What Is A Memorandum of Understanding (MOU)?

A memorandum of understanding (MOU) is a formal document that outlines an agreement between two or more parties. It is not legally binding but indicates the parties' willingness to proceed with a contract.

The MOU serves as a starting point for negotiations because it establishes the scope and goal of the discussions. These memos are most commonly seen in international treaty discussions but can also be utilized in high-stakes business transactions like merger negotiations.

On the scale of formal agreements, a memorandum of understanding is less legal than a contract but more official than a handshake. Although a note of experience and a warranty may sound similar, they differ.

Unlike an MOU, a contract is a private written agreement that is legally binding and enforceable by a judge.

The memorandum of understanding is the most prevalent document in international relations. Nonetheless, it is a common bargaining strategy in the commercial world.

How a memorandum of understanding (MOU) works?

A Memorandum of Understanding (MOU) is a document that communicates a desire to continue working together. It indicates that the parties have reached an understanding and are going forward. It's a profound statement that a contract is on the way, even if it's not legally binding.

You've probably heard of different Memorandums of Understanding (MOUs) signed by two or more countries. So, what exactly is a Memorandum of Understanding?

A "memorandum" is a letter, and an "understanding" is the process of determining another's intentions.

A Memorandum of Understanding (MOU) is a formal bilateral or multilateral declaration of mutually agreed-upon goals for the benefit of the parties involved. It primarily communicates the purpose, goals, and a broad roadmap for the partnership to the parties concerned. 

Commercial transactions, mergers and acquisitions, government tenders, and international trade use MOUs. These are commonly used in international relations because they can be created rapidly and with relative confidentiality, especially when planning significant agreements.

Each party's expectations, tasks, responsibilities, liabilities, wages, and limits for the other are outlined in an MOU. To meet the MOU's provisions, both parties are willing to move forward with the collaboration.

In the United States, an MOU is the same as a letter of intent. A letter of intent, a memorandum of understanding, and a memorandum of agreement are all almost identical documents. 

Everyone agrees on a mutually beneficial goal and expresses the intention to see it through.

MOUs represent the mutually agreed-upon expectations of the concerned persons, organizations, or governments. 

Many federal and state government agencies also employ them, especially when large contracts are being prepared.

MOU vs MOA

Memorandums of understanding (MOU) and memorandums of agreement (MOA) are two legal contracts used to outline terms, intentions, and agreements between two parties. 

They are similar in this sense but exhibit major differences in terms of their legal nature, specificity, legal consequences, purpose, and enforceability. 

Both parties entering these contracts must know the nuances and obligations associated with each document to facilitate relationship building and cooperation.

The MOU and MOA are valuable tools for outlining agreements between parties across various contexts. 

While the MOA offers a more legally binding framework outlining specific performance obligations, the MOU allows parties to outline their grounds for cooperation without entering into a complete, legally enforceable contract. 

Parties must decide between the two by carefully considering their desired level of commitment, relationship, and the overall purpose of their joint agreement. In doing so, parties can make informed decisions that align with their intentions and ensure the success of their collaborative endeavors.

Contents of an MOU

A Memorandum of Understanding (MOU) provides precise points of agreement. It identifies the participants, outlines the project to which they are agreeing, defines its scope, and specifies the duties and obligations of each party.

Even though the MOU is not legally binding, it is an essential step since it takes time and effort to negotiate and construct a decent instrument. 

To construct an MOU, the parties must first reach an understanding. Then, before proceeding, each side must determine what is most important to the other.

MOUs can be tailored to the specific requirements of any organization or party. During the early phases of a negotiation, each party creates its best-case scenario MOU with all of the desirable outcomes of a hypothetical deal. 

This is where discussions begin, including what that party is willing to provide to the opposing party or parties, their wishes, and which themes are open for further debate. The following should be stated or described in every detail of an MOU:

• Who are the partners, and how can I get in touch with them?
• What they'll be working on, the background of the project, and why the MOU is being included in the document's scope, as well as who will benefit from the MOU's provisions
• Specified activities being carried out if they haven't previously been decided.
• Concerns about funding
• Each party's responsibilities and roles
• A timetable, if necessary.
• Contract duration 
• All parties who agree to the MOU must sign and date their signatures.

MOUs are valuable documents used in any business to kick off significant undertakings. A paper trail of the terms proposed throughout the discussion can be created by finishing an agreement through a series of memorandums of understanding (MOUs).

Steps involved while drafting an MOU

Planning, drafting, negotiating, negotiating dates, and enforcing limitations are the five steps in an MOU.

The following is a sample MOU:

1. Both sides have declared their goals, prerequisites, and dos and don'ts for MOU development to achieve a common goal.
2. The participants then doodle a rough outline for the memorandum. They then discuss the various components of the text to get to an agreement.
3. Then, the parties agree on a start and end date for the MOU, which in this case is five years. They also define the specific factors that could lead to the MOU being canceled, such as non-compliance.
4. The disclosure rules, privacy terms, disclaimers, and personal information the parties have consented to are then included.
5. Finally, the Memorandum of Understanding is signed and accepted by both parties.

Let's have a look at the main components included in the above memorandum of understanding sample/template now that we know what an MOU looks like :

• Introduction of Parties/Partners: The parties are listed in this section of the MOU, along with their names and the type of commercial activity they engage in.
• Purpose: When we say objective, we mean both parties are motivated and eager to work together.
• Roles and Responsibilities: An MOU lists the tasks, roles, functions, and obligations of each party.
• Funding: Each partner's willingness to commit an amount or a percentage of the project is listed in the funding section.
• Period: The MOU should specify how long the collaboration will last. The start and end dates, as well as any factors that may cause these dates to change, are all included in this section of an MOU.
• Confidentiality: Because any business transaction involves exchanging confidential information, the parties must agree to the MOU's non-disclosure restrictions.
• Dispute Resolution: While the MOU is not legally binding, it does include a section that states that problems would be resolved through mutual discussion and negotiation.
• Disclaimer: The partners commit to following all federal and state laws in this MOU condition.
• Conditions of Alteration or Termination: This clause of an MOU reflects all situations/events that cause an MOU to be terminated.
• Contact Person: Each corporation appoints a representative to handle the transaction; this section contains their names, phone numbers, and addresses.
• Signature: The document should be signed by both organizations' authorized people or representatives.
• Date of Signing the MOU: The MOU paper is signed by both partners' representatives.

Advantages and disadvantages of creating an MOU

The parties can explicitly state their objectives and goals in a memorandum of understanding. This avoids the chance of future disputes and reduces uncertainty.

An MOU also acts as a framework for any future contract that both parties may or may not want to draft by outlining what each party expects of the other.

Here are some advantages of an MOU:

• Clear goals: A memorandum of understanding allows all parties to set mutual goals. All of the parties' objectives and goals can be stated explicitly.
• Reduced uncertainty: An MOU typically spells out all parties' goals and expectations, so it can help prevent future disagreements.
• Future foundation: Because the memorandum of understanding already contains conditions and objectives, you can use it as the basis for a legally binding contract in the future.
• Ease of exit: On the other hand, because this sort of agreement is not legally binding at the MOU stage, if any party in the agreement feels that their aims and objectives are not being accomplished, they can quickly terminate it.
• Paper trail: When a memorandum of understanding is signed, it establishes a written record of the terms of the negotiations.

On the other hand, the disadvantages are: 

• The biggest downside of an MOU is that it is not legally binding. While this may be useful in some circumstances, neither side is required to carry out the terms of the MOU, so they can walk away or change their expectations.
• For many countries, non-legality has been a complex topic. As a result, MOUs are held to some ethical standards in some nations.
• Some MOUs include a legal clause with the parties' approval. The MOU can then be deemed a legally binding instrument in this situation. 

Offer acceptance, the goal of legal binding, and consideration are the four significant aspects of a legally binding MOU. Even though an MOU is not legally enforceable in many circumstances, it is a starting point for collaboration, making it attractive. 

Furthermore, a formal contract is frequently created over time when two parties join a collaboration. MOUs are commonly used as a simple starting point for such discussions

MOUs can take a lot of time and effort to draft, and if one party's requirements change drastically, the MOU is a waste of time and effort. 

This aspect of MOUs allows for a swift and painless exit if the parties cannot agree on the purposes and goals; it has also caused some international leaders to be skeptical about MOU-based conversations.

Uses of MOUs

MOUs could be helpful in a variety of situations, including:

• Private enterprises and the private sector: A memorandum of understanding is usually used as a non-binding agreement during business or personal enterprise dealings. MOUs are produced without the use of a legally binding or formal contract. The MOU covers the following in these situations:
  • All parties have responsibilities.
  • All parties' requirements
  • The agreement's terms and conditions
• Public affairs and government: Memorandums of Understanding (MOUs) can also be utilized within government departments.
• On an international level, MOUs are classified as treaties under public international law. As a result, they must be examined in the UN Treaty Collection.

The parties' aim that created the MOU and the signatories' positions must be stated to decide if the agreement is legally binding, especially regarding treaties. 

When establishing the legitimacy of the MOU document, the specific terminology used throughout the agreement is also taken into account.

When signing a memorandum of understanding, it is critical to produce a straightforward document that all parties can agree to and comprehend. That's why it's crucial to consult with an expert lawyer to ensure that your MOU accurately expresses your intentions, aims, and expectations.

Researched and authored by Rhea Rose Kappan | LinkedIn

Reviewed and edited by Justin Prager-Shulga | LinkedIn 

Free Resources

To continue learning and advancing your career, check out these additional WSO resources:

• Acquisition Premium
• Business Exit Strategy
• Deal Sheet
• Pitchbook
• Takeover Premium