Memorandum Of Understanding: Is Your Business In Need Of One?

What is a memorandum of understanding? Abbreviated as MOU, it is a nonbinding agreement between two parties. Basically, it is something between a contract on paper and a deal made with a handshake. In other words, it is a written argument that is used as a foundation for making an actual contract in the future. It highlights what the framework and/or most important terms of the deal are.

However, if it consists of content which looks very much like a contract, there is a probability that it can be seen as legally binding, and therefore something that you can enforce. In this article, we are going to discuss when and whether your business needs one.

When is a memorandum of understanding used?

When your negotiations with another party are still in an early phase, you use an MOU so that you can make business transactions. It is used as a form of agreement on what the crucial terms of that transaction are going to be. It is used in various situations, such as:

  • To make sure that both parties understand these crucial terms well

  • Show that parties are serious in terms of negotiations, and that they both have the intention to get to a mutual goal and enter a contract

  • To build a framework so that the extent and the scope of all negotiations that are going to happen can be comprehended beforehand

  • To make anyone who is relevant up to date with how the negotiations are working out. This is done via recorded milestones, points that have been debated, and decisions that the parties have reached

  • To work as a kind of public announcement that the parties intend to enter a contract

  • To be a kind of proof of eventual business transactions to investors who might be interested

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What are the contents of a memorandum of understanding?

Every MOU is one-of-a-kind. So, when you decide to come up with one, it is very important that you have two things in mind – the agreements between you and the other party, and common goals. As for its content, it can contain:

  • The common goals of both parties

  • Deadlines that have been agreed upon

  • The role(s) of the parties

  • The whole purpose of making a commercial partnership

  • How possible arguments are going to be resolved

When do you use a memorandum of understanding?

An MOU, also known as heads of agreement, are most commonly used when commercial partnerships are made. This is because both sides need to be aware of their rights and responsibilities. All of this will then be implemented into a formal contract, once the parties decide to make one.

Basically, the situations when you may want to use an MOU could be when you don’t want to form any legal relations, but want to make the partnership public and outline its goals.

How is a memorandum of understanding different from a letter of intent?

An MOU and a letter of intent are pretty often mixed up due to being very similar. However, it is important to point out that there are certain important differences:

  • A memorandum of understanding uses the kind of language that is a lot more formal. Therefore, it looks a lot more like the contract that is going to be made later on. In other words, it works as a summary of the transaction(s) before being made into a final agreement

  • A letter of intent is used for just two parties. An MOU may include more than two

  • A letter of intent is signed by the party that makes the proposition for the agreement to be made. An MOU needs to be signed by both parties

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In summation

When you intend to start a partnership with another business, a memorandum of understanding can be very useful to outline its framework. This way you will, basically, make sure that both sides are on the same page when it comes to expectations, and that they understand very well what their responsibilities are. Everything that is negotiated, especially mutual goals, is highlighted in an MOU.

What you need to be aware of is that an MOU isn’t necessarily legally binding. So, in case that you intend to make a risky relationship, or you are putting a lot at stake, you should move straight to coming up with a contract which has a strong legal ground.

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