Memorandum of Understanding (MOU)

An expression of aligned will between the parties in question and depicts the intent of a common line of action

What is a Memorandum of Understanding (MOU)?

A memorandum of understanding, or MOU, is defined as an agreement between parties and can be bilateral (two) or multilateral (more than two parties). The MOU serves as an expression of aligned will between the parties in question and depicts the intent of a common line of action.

 

Memorandum of Understanding (MOU)

 

The MOU, although a formal document, is not legally binding. It merely shows the willingness of each concerned party to take action to move the contract forward. In addition, an MOU brings about the definition of the purposes and scope of negotiations.

Hence, the document serves as the foundation for negotiations. Such types of agreements are commonly used in business opportunity negotiations and discussions and treaty negotiations.

 

Summary

  • A memorandum of understanding (MOU) is defined as an agreement between parties and can be bilateral (two) or multilateral (more than two parties).
  • In order to prepare a complete and effective document (MOU), the parties affected must first reach an understanding acceptable by each party and clear information on the important stances for each of those parties.
  • The MOU, although a formal document, is not legally binding, merely shows the willingness of each concerned party to take action to move the contract forward.

 

Contents of an MOU

The contents of an MOU include but are not limited to the scope and intended action of the MOU, the project, and the names of the parties and their respective responsibilities. Other contents include the length of the agreement, when the agreement begins, and when or how either party can terminate the agreement. Also, an MOU can contain contact information for the parties involved and possible dates for performance reviews.

In order to prepare a complete and effective document (MOU), the parties affected must first reach an understanding acceptable by each party and clear information on the important stances for each of the parties.

It is important to note that although MOUs are not legally binding, they may include a clause that can be legally binding, and violations of the clauses may result in the guilty party being liable. The following key elements may render an MOU to be legally binding;

1. An offer

2. Acceptance of the offer

3. Legally binding intention

4. Consideration

 

MOU Process

The process of getting a finalized MOU is initiated by the involved parties preparing their own MOU, following their ideal expectations and desired outcomes, the key outcomes they are not willing to compromise on, and what the respective party believes the other stakeholders can expect and benefit from the MOU. It serves as the party’s initial position before the negotiations begin.

 

Uses of MOUs

 

Private Sector or Private Enterprises

In business and private enterprise dealings, the MOU normally serves as a non-binding agreement that encompasses the responsibilities and requirements for each party and the terms and details pertaining to the agreement. It is done without establishing a formal contract or legally enforceable contract.

 

Government and Public Affairs

MOUs can be used within government departments; for example, in the United Kingdom, the document serves as an agreement between parts of The Crown.

 

Public International Law

On an international level, MOUs fall under the treaties category, and they must be registered in the United Nations Treaty Collection. In order to determine whether or not the agreement is legally binding (especially for treaties), the intent of the parties and the positions of the signatories must be presented. The wording used in the agreement also plays a role in determining the legal nature of the document.

 

Advantages of MOUs

  • An MOU allows for the establishment of a mutual intention. It enables each party’s goals and objectives to be clear.
  • The finalization of an MOU allows for having a paper trail or records of the terms that have been in the negotiations leading towards finalization.
  • MOUs reduce the levels of uncertainty between the involved parties because the document usually highlights the expectations and objectives and prevents possible future disagreements.
  • An MOU provides ease of exit, as any party that finds the objectives and goals not being met can easily end the agreement.
  • Because the MOU already outlines objectives and terms, the document can serve as the foundation for a possible future contract.

 

Disadvantages of MOUs

  • The concept that MOUs are not legally binding allows for either party to exit the agreement or not meet the requirements outlined in the agreement without consequences.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

Confidential Information Memorandum (CIM)

Definitive Purchase Agreement

Letter of Intent (LOI)

Offering Memorandum

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