What Should Be Included in a Memorandum of Understanding?
Not sure what a Memorandum of Understanding is, or what you should include? This guide will help clarify some questions you might have.
What is a Memorandum of Understanding?
A Memorandum of Understanding (MOU), is a non-legally binding agreement between two or more parties, expressing each parties proposed terms during the negotiation stage. MOU’s, also referred to as a letter of intent , are a more formal version of a ‘gentleman’s agreement’. Generally, MOU’s communicate a willingness to proceed with a binding contract. They allow parties to record what has already been agreed on before a legally enforceable document is executed. A well drafted MOU communicates the mutually agreed expectations of all parties involved.
When should you use a Memorandum of Understanding?
MOU’s act as a non-binding alternative to entering into a contract. A great time to use MOU’s is where parties would like to set out the proposed terms between parties during the negotiation stage, but are not ready to deal with the ramifications of a binding agreement.
MOU’s are also common where parties have no intention to imply a legally binding commitment. Whether it’s in the early stages of an agreement and both parties are skeptical, or parties do not wish to ‘lawyer up’ and engage in the strains of contractual negotiations. However, it is worth noting that signing an MOU generally implies a binding contract is imminent.
What should be included in a Memorandum of Understanding?
You should draft your MOU to reflect what you and the other parties have agreed to, and your mutual goals. MOU’s do not require excessive detail. However, there are some key aspects we recommend including in your MOU:
Intention of the proposed agreement
Your MOU should clearly state the intention of the proposed agreement. It should accurately provide details of the general intentions of the parties. You should outline the key terms of negotiations that you will later include in a contract. A successful MOU will clearly identify what is most important to each party before proceeding and committing to a legally binding contract. Your MOU should state a time when the partnership commences and terminates, so that there are no disputes regarding these issues in the future.
Obligations of each party
Your MOU should list the parties involved and outline their roles and obligations. This section should elaborate on each parties sole and shared responsibilities. Such as what the directors and workers will do to effectively implement the agreement. Generally, this section will be the longest and most detailed. This is because communicating each parties roles and responsibilities is the primary goal of your MOU.
Options to include clauses
You should consider including certain clauses to your MOU. For example; clauses for confidentiality, limitation of liability, non-solicitation and/or exclusivity obligations can be inserted. If you wish for the MOA to be non-binding, it is important you insert a specific statement which says that it is not intended to create legally binding obligations.
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Once the terms and clauses satisfy each party, you should sign the agreement to get started. We recommend you seek legal advice before signing so all the terms and conditions suit your party and that you are legally protected in case anything goes wrong during the agreement.
James is a Legal Tech Intern at Lawpath. He is currently studying a Bachelor of Laws and a Bachelor of Business, majoring in Finance at the University of Technology Sydney.