What Is a Memorandum of Understanding (MOU)?

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An agreement is a legally binding contract that is signed after all the terms of a deal have been ironed out and agreed upon. Memorandum of Understanding is the full form of an MOU.

The Memorandum of Understanding is nothing more than a means for two people to agree with one another. It does not grant either of the parties involved in the transaction any rights, but it can be used to establish the intentions of the parties that are part of the trade prior to an actual deal made between them. There are situations where it makes more sense to use a less stringent, non-legal document rather than a legally binding one.

The memorandum of understanding outlines the expectations that have been mutually agreed upon by a group of people or organizations that are working towards a common goal. For example, two organizations who share a similar goal can sign an agreement to expressly agree to collaborate in resolving a dispute or to aid one another’s efforts.

The memorandum of understanding is just a formal handshake. In the United States legal system, a Memorandum of Understanding is the same thing as a Letter of Intent (LoI), which is a non-binding written agreement that suggests that a formal agreement will be signed. If the MOU agreement is drafted with a monetary transaction in mind, it will acquire a legally binding document for all parties involved.

How an MOU Works?

An MOU is a declaration of agreement to proceed. It is a sign that both parties have reached an agreement and are taking steps ahead. Although it’s not legally binding, it is a serious statement that a contract is imminent.

MOUs are agreements that establish the mutually agreed expectations of the individuals, organizations, or governments involved in the MOU. They are often used in international relations because MOUs can be made relatively swiftly and in secret, unlike treaties. 

When Should You Use a Memorandum of Understanding?

Here are some common reasons to use an MOU:

  • You have your own business, and you plan to collaborate with another company.
  • You own a small business, and you often collaborate with other companies.
  • Another business has asked to work with your company.
  • Your company and a different business would like to work on a particular project together.

Contents of an MOU

An MOU clarifies specific points of understanding. It lists the parties involved, describes the project on which they are agreeing, defines the project’s scope, and outlines each party’s role and duties.

While it’s not a legally binding document, it is a crucial step because of the time and effort involved in negotiating and writing an effective document. To create an MOU, the involved parties must come to a mutual understanding. In the process, both sides learn what is important to the others before proceeding.

The process usually starts with each party drafting its own ideal MOU. It will consider its ideal or desired outcome, what it can offer to other parties, and which points may be non-negotiable on its side. This is the starting point for negotiations.

Advantages and Disadvantages of an MOU

A memorandum of understanding has many advantages and drawbacks for the parties signing the agreement.

The advantages of an MOU are:

  • Clear objectives: A memorandum of understanding permits everyone to set their shared intentions. Parties can clearly define all of their goals and objectives.
  • Reduced uncertainty: An MOU usually makes the purposes and expectations for all parties very clear, which helps prevent future disputes from happening.
  • Foundation for the future: The Memorandum of Understanding document already defines terms and objectives, which means you can use this document to establish a basis for a binding contract in the future.
  • Ease of exit: If any parties involved in the agreement believe that their goals and expectations are not being fulfilled, they can simply terminate the agreement because it’s not legally in force at the time of the MOU.
  • Paper trail: Once a memorandum of understanding is finalized, it creates a clear record of the terms included in the negotiations.

The biggest drawback of a memorandum of understanding is that it’s not legally binding. Therefore, an MOU can make it simple for any involved party to either end the agreement or not meet the stated requirements because these actions do not typically have consequences.

While a memorandum of understanding isn’t a legally enforceable document, it is considered an important step. This is because the process of drafting an effective MOU document requires both parties to invest time and effort.

Is a Memorandum of Understanding Legally Binding?

Although an MOU is an official document, it’s typically not legally binding. Instead, the MOU serves as proof of the parties’ willingness to take whatever actions are required to move the agreement forward. The memorandum of understanding also specifies the purposes and the scope of negotiations. In other words, the MOU document acts as the basis for negotiations. These kinds of agreements are often used in:

  • Business opportunity discussions
  • Business opportunity negotiations
  • Treaty negotiations

A Memorandum of understanding is similar to a letter of intent in United States law. MOUs are generally indistinguishable under the law from memoranda of agreement and letters of intent. They all outline an objective that is mutually beneficial and the need for all involved parties to achieve this stated goal.

Although MOUs aren’t legally binding documents, they can contain a clause that becomes legally binding. In such instances, the party who violates the clause can be held liable.

Essential elements that may render a memorandum of understanding to be legally binding include:

  • An offer
  • Acceptance of that offer
  • Legally binding intent
  • Consideration (the benefits each party expects to receive from the agreement, such as payments or other forms of compensation)

What Is the Difference Between an MOU and MOA?

Here’s the difference between an MOU and an Agreement:

A deal is a contract in which two or more parties decide to work together to achieve a common goal.

  • A memorandum of understanding comprises the components of an offer, acceptance, intention, and consideration, while an agreement contains the elements of an offer and acceptance.
  • Contrary to that, the Memorandum of Understanding is a written document that defines the conditions of an agreement and is separate from the actual agreement itself.
  • The primary distinction between an Agreement and an MoU is that the former can be enforceable in a court of law, but the latter cannot. However, the parties remain bound by estoppel. An agreement can be made enforceable in a court of law.
  • An Agreement is legally binding on the parties, while a Memorandum of Understanding is only legally binding on the parties if it is executed in exchange for financial consideration.
  • Parties to the agreement have collateral rights, while the parties to the memorandum understanding don’t own collateral rights.
  • An agreement may be inferred, but a memorandum of understanding may never be inferred.

How Do You Write an MOU?

Usually, a lawyer will draft an MOA. An MOU should clearly state the following: what parties are involved, the context of the agreement, the proposed date at which the agreement will take effect, the contact details of all relevant parties, the overall scope of the agreement, and what each party hopes to accomplish, as well as space for all required signatures.

Conclusion

An MOU is essential as it permits each party to express their intentions and what they expect from each other clearly. Drafting an MOU can help settle any disputes before each party enters into a legally binding contract.