Which agreement type is typically less formal than other agreements and expresses areas of common interest?

What Is a Memorandum of Understanding?

A memorandum of understanding (MOU) is a written agreement between parties that expresses their aligned will. This type of document also details the intent of a common line of action. A memorandum of understanding can be bilateral (between two parties) or multilateral (between more than two parties).

You can think of a memorandum of understanding as a way for all parties to express that they agree to proceed with their mutual goals. An MOU indicates that the parties have reached an understanding and are ready to move forward. Though an MOU is not legally binding, it serves as a serious declaration that a binding contract is imminent.

On the scale of formal agreements, a memorandum of understanding is less formal than a contract but more formal than a handshake. A memorandum of understanding may sound a lot like a contract, but there are significant differences. For example, a contract is a private written agreement, and unlike an MOU, it is legally binding and enforceable by a judge.

The memorandum of understanding document is most often found in international relations. However, it is a common device in business negotiations as well.

Other Names for a Memorandum of Understanding

You may see this type of document referred to by a few different names. Common names for a memorandum of understanding include:

• MOU
• MoU
• Memorandum of Understanding Form
• MOU Agreement

When Should You Use a Memorandum of Understanding?

Here are a few common reasons for using an MOU:

• You own a business and plan to partner with another business.
• You own a small business and frequently partner with others.
• Another business has asked about working with your business.
• Your company and another business want to work on a specific project together.

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Is a Memorandum of Understanding Legally Binding?

Although an MOU is a formal document, it is typically not legally binding. Instead, the MOU is used to demonstrate each party's willingness to take whatever action is necessary to move a contract forward. The memorandum of understanding also defines the purposes and the scope of negotiations. In other words, the MOU document acts as the foundation for negotiations. These types of agreements are used frequently in:

• Business opportunity discussions
• Business opportunity negotiations
• Treaty negotiations

A memorandum of understanding is the same as a letter of intent in United States law. MOUs are basically indistinguishable under the law from letters of intent and memoranda of agreement. These documents all discuss a mutually beneficial goal and the desire for the involved parties to complete this stated goal.

Here is some further reading about letters of intent.

Though MOUs themselves are not legally binding documents, they can include a clause that becomes legally binding. In those cases, a party that violates that clause can be held liable.

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

• An offer
• Acceptance of that offer
• Legally binding intention
• Consideration (the benefit each party expects to get from the contract, such as payment or other compensation)

What Information Must a Memorandum of Understanding Include?

Though not limited to these details, a memorandum of understanding should include the following information:

• Scope and intended action of the memorandum of understanding
• Information about the project
• Name of parties involved in the agreement
• Respective responsibilities of the involved parties

The MOU should also include certain key facts, including:

• When the agreement begins
• The length of the agreement
• When and/or how any party involved may terminate the agreement

Some MOUs also include contact information for the parties involved as well as potential dates for performance reviews.

How Does a Memorandum of Understanding Work?

Before preparing the document, the parties who are creating a memorandum of understanding must reach an understanding that all parties accept. Everyone involved should have clear information about the important stances each party holds. This way, the parties can create a complete and effective MOU document.

To create a memorandum of understanding, both (or all) parties typically first prepare their own MOU documents that discuss:

• Ideal expectations
• Desired outcomes
• Any essential outcomes that they would not compromise on
• How they believe the other stakeholders can benefit from the memorandum of understanding

A memorandum of understanding serves to demonstrate each party's initial position before entering into negotiations.

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Advantages and Disadvantages of Creating an MOU

A memorandum of understanding comes with both benefits and drawbacks for the parties creating the agreement.

Advantages of an MOU include:

• Clear objectives: A memorandum of understanding allows all parties to establish their mutual intentions. Parties can clearly state all of their objectives and goals.
• Reduced uncertainty: An MOU typically makes the objectives and expectations of all parties very clear, so the document helps prevent potential future disputes from occurring.
• Foundation for the future: The memorandum of understanding document already outlines terms and objectives, so you can easily use this document as a foundation for a binding contract in the future.
• Ease of exit: On the other hand, if any party involved in the agreement feels that their goals and objectives are not being met, then they can easily end this type of agreement since it is not legally binding at the MOU stage.
• Paper trail: Once a memorandum of understanding is finalized, it creates a clear record of the terms included in the negotiations.

The major disadvantage of a memorandum of understanding is that it is not legally binding. As a result, an MOU makes it very easy for any involved party to either exit the agreement or not meet the outlined requirements since these actions don't typically have consequences.

Although a memorandum of understanding is not a legally enforceable document, it is consistently viewed as a significant step. This is because drafting an effective MOU document requires all parties to put forth time and effort. The parties creating a memorandum of understanding must come to a mutual understanding, learn about what is most important to the others involved, and agree to move forward.

Uses of a Memorandum of Understanding

MOUs may come into play in a few sectors, including:

• Private sector/private enterprises: A memorandum of understanding generally serves as a non-binding agreement during business or private enterprise dealings. MOUs are created without a legally enforceable or formal contract. In these situations, the MOU covers:
  • Responsibilities of all parties
  • Requirements of all parties
  • Terms and details of the agreement
• Government and public affairs: MOUs may be used within government departments as well.
• Public international law: MOUs are categorized as treaties on an international level. Therefore, they must be reviewed in the United Nations Treaty Collection. Especially when it comes to treaties, the intent of the parties creating the MOU and the positions of signatories must be presented to determine if the agreement is legally binding. The exact wording used throughout the agreement also comes into play when determining the MOU document's legality.

When signing a memorandum of understanding, it is important to create a clear document that all parties can agree to and understand. That's why it's so important to work with an experienced lawyer who can make sure that your MOU clearly states your goals, intentions, and expectations.