What is a Memorandum of Understanding (MOU)?
- A memorandum of understanding outlines the main points of agreement that the parties involved in a negotiation have reached.
- The MOU is a mutually agreed summary of the areas of agreement and expectations of all signatories (those involved in the negotiations).
- Whilst not legally binding, the memorandum of understanding signals that a contract is imminent or there is a serious intention to move towards a formal contract.
- In the UK an MOU is considered to be different to a letter of intent, whilst under US law they are seen as the same thing.
- The MOU is usually used in high-level business negotiations such as mergers or in international negotiations.
Why is a Memorandum of Understanding Important?
A memorandum of understanding is important because it allows all parties involved to clearly state their objectives and what they expect from one another. Drafting an MOU can help solve any disputes before each party enters into a legally binding contract or agreement.
Is a Memorandum of Understanding the Same as a Letter of Intent?
At first glance a Memorandum of Understanding (MOU) can appear to be very similar to a letter of intent. The similarities are found in that it is a document that seeks to outline the willingness of two or more parties to move forward with a formal contract.
However, it varies from a letter of intent in that it is often used as a defining document to specify the scope and purpose of on-going negotiations, rather than acting as a way of providing confidence to a sub-contractor to start works on a project before the full legal documentation is in place.
An MOU is most often used in international negotiations but they also have a purpose where a negotiation or agreement such as a merger between two large companies is involved.
How Does a Memorandum of Understanding Work?
The MOU is often seen as a ‘gateway’ document, in that it indicates willingness/intent from all sides to move towards a contract. It is not legally binding, as long as it is drafted correctly, but it is a recognised declaration that a contract will follow in the near future.
In the UK an MOU is considered to be different to a letter of intent though in the United States they are seen as inseparable due to the fact that both documents communicate an agreement on mutual goals and a willingness to progress matter to contract stage.
An MOU is basically a way to communicate the mutually accepted expectations of individuals, companies or, sometimes, Governments. Their advantages are that they can be produced relatively quickly, when compared to, for example, an international treaty. Government Departments often favour the use of an MOU when awarding major contracts to outside parties.
What Does a Memorandum of Understanding Consist of?
The elements of a Memorandum of Understanding (MOU) will obviously vary from memorandum to memorandum as every agreement and negotiation will be different. However some details will always have to be included, such as the names of the parties involved, details of the project on which they are agreeing, the full scope of the project and what the individual roles and responsibilities are to be.
Why an MOU is a significant step in negotiations is because, even though it is not a full contract or agreement, there is still significant time and effort involved in producing the document itself. What usually occurs at the outset of the process is that all parties involved start by drafting their own version of the MOU. Not surprisingly this will consist of their best outcomes as a starting point in further negotiations. Some areas will be identified as negotiable; others will be marked as non-negotiable.
A MOU communicates the mutually accepted expectations of the people, organisations, or governments involved.
The Advantages and Disadvantages of a Memorandum of Understanding.
The advantages of a memorandum of understanding are that it reduces uncertainty and reduces future disputes (in theory).
The MOU also acts as a clear map for the end contract as it lays out clearly what each party expects of the other and the main terms of the final document. (See also Heads of Terms)
The main disadvantage of an MOU is that it is not legally binding (though this may be an advantage in some situations). Either party still has the option to decide not to continue with the negotiations or change their position. Therefore you can see why an MOU is only considered if negotiations have significantly progressed as the drafting can take significant time and modifications can be expensive and time consuming.
An MOU is not legally binding. However, it is an excellent way to prepare for the more formal contract or agreement by allowing all parties to negotiate and agree the broad concepts and expectations that have come from their discussions so far. It can facilitate a smoother path to a final formal agreement.
Need Assistance or Legal Advice?
rhw solicitors have a commercial law team with a vast amount of experience and know-how and we are able to advise and assist in all aspects of contractual agreements including the creation of new contracts and amendment of current agreements.