5 Benefits of Using a Memorandum of Understanding (MOU)
Are you negotiating terms with another party but haven't entered into a contract? Read our guide on the benefits of using a Memorandum of Understanding.
So you are negotiating terms with another party but haven’t created a formal contract yet? A memorandum of understanding (MOU) is a useful tool parties can use to establish a business relationship. Importantly, it is a non-legally binding document created prior to entering into a contract. It records proposed terms and establishes a basic intention between the parties to create business relations. So what are the benefits of using a MOU? Read our guide on five simple ways your business can benefit from using a MOU.
1. Establishes a Common Intention
As with any business dealing, it is paramount that both parties understand each others goals and objectives. While this can be difficult at times, an MOU can be a great asset to your business relations. Without clear terms and effective communication, dealings will likely fail. This is why an MOU is greatly beneficial. Parties are able to simply set out their requirements and expectations. As a result, this will establish a common intention for future engagements.
So you might be wondering what the difference is between an MOU and a formal contract? The primary difference is that an MOU is not legally binding, whereas a contract is. Following on, an MOU should not contain specific terms or promises included in the agreement. For further information, you can read our guide on ‘When Should a Memorandum of Understanding (MOU) Be Used Instead of a Contract?’.
2. Reduces the Risk of Uncertainty
Business negotiations can be rocky and uncertain at times. They can be particularly hazy at the beginning of relations between the parties. There is nothing worse than disagreeing with your business partner over contract terms. Hence, MOU’s provide a great safeguard to reduce the risk of uncertainty in expectations and objectives. Specifically, this is beneficial in commercial partnerships and relations where the engagement is over a prolonged period. Setting out clear prospects and ambitions in the initial negotiations can avoid disagreements between the parties. It can also reduce the risk of uncertainty when drafting the formal contract. This is because the proposed terms are already set out and agreed upon by the parties.
3. Records Prior Agreements
Often during the course of negotiations, two or more parties agree on certain terms which would then appear in the future contract. So what happens when a party retracts or forgets these terms? This is where a MOU comes in handy. Although the document is not legally binding, it is useful as it records what has been agreed upon during negotiations. Therefore, this provides a clear understanding between the parties as to their common objectives. Further, a MOU is also beneficial as it enables parties to safely communicate confidential information. This is a particularly valuable document in the formation of partnerships.
4. The Ease of Ending Engagements
As discussed, an MOU can facilitate positive relations between parties as terms are clearly set out. Feeling a little unsure about whether you wanted to engage in relations with the other party? An MOU is a great starting point at it establishes what both parties want to achieve out of the agreement. If you find your objectives do not align, exiting the agreement is much easier now. Unlike an MOU, a formal contract is legally binding. Therefore, if you wanted to exit the agreement after the contract is formed, a formal termination process must be followed. This can be more complex, stressful and sometimes costly.
5. Provides a Framework for Future Dealings
Even for experienced businesses, entering into a formal contract can be daunting when the project is complex or over a long period of time. Therefore, an MOU can put your mind at ease. Having the proposed terms already set out in a prior document provides a framework for future dealings. The MOU can be used as a basis for the future contract. It can also be referred back to as a reminder of the parties objectives and intentions if any confusion arises. In complex or high risk situations, it is always best to be on the safe side. Having a formal document in advance ensures parties are on the same page.
While a MOU can seem unnecessary if you are planning on entering a formal contract, it is an extremely valuable tool. Don’t undermind the benefits of using an MOU. However, businesses should be advised of the value of establishing a friendly relationship and common intention with their counterpart. If you are unsure whether you should use an MOU, contact a business lawyer to help you get started.
Laura is a Legal Intern at Lawpath. She is studying a Bachelor of Laws and a Bachelor of Business Administration at Macquarie University. Laura is interested in Intellectual Property Law and how technology can assist in improving access to justice.