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Document Overview

If you are interested in entering into an agreement with another entity, a Memorandum of Understanding is a good document to start with. A Memorandum of Understanding, though non-legally binding, sets out the proposed terms in the negotiation stage. You will be able to record what has already been agreed on before a legally enforceable document is executed. 

If you're communicating sensitive information to potential investors, it is essential to ensure this information is protected with a Memorandum of Understanding.

Use this Memorandum of Understanding if:

  • You would like to set out the proposed terms between you and another party during the negotiation stage.

What does the Memorandum of Understanding cover?

  • Limiting the use of information;
  • Prohibition of duplicating memorandum; and
  • Limitation of liability.

Other names for Memorandum of Understanding include:

  • Gentlemen's Agreement

What’s the difference between a memorandum of understanding and letter of intent?

Memorandum of Understanding sets out the proposed terms in the negotiation stage, however, it is not legally binding in nature. A letter of intent is used in most large business transactions and outlines the process of negotiation and provides a structure for how things will proceed in the intended agreement. Unlike a memorandum of understanding, provision of a letter of intent can be considered legally binding in regards to certain provisions, if specified within the letter of intent.

In what situations are memorandum of understandings commonly used?

A memorandum of understanding is mostly used to record what has already been agreed on before a legally enforceable document is executed. It is often used in cases where parties intend to not imply a legal commitment, whether it's in the early stages of an agreement and both parties are skeptical or there is no intention of a legally binding agreement in a deal.

Can a Memorandum of Understanding expire?

Yes a memorandum of understanding can expire. As it is generally not a legally binding document, there is no need for a termination clause to end negotiations that take place within the memorandum. Generally, the parties within the memorandum will come to an agreement to terminate negotiations and the memorandum will cease to continue and be effective in nature.

How much detail does my memorandum of understanding need?

A memorandum of understanding does not require excessive amount of detail, in that every detail of the agreement and the companies be listed. However, there are certain elements that should be recorded to ensure that the memorandum is drafted effectively. A memorandum of understanding should state the the intent of the agreement in regards to the parties involved. The clauses should be set out to ensure that the intentions of both parties are pure, in that there are no ulterior motives or underlying issues along those lines. The memorandum should also outline the roles of the parties involved, such as what the directors and workers will do to effectively implement the agreement. It is also important to provide a time when the partnership commences and terminates, so that there are no disputes regarding these issues in the future.

The memorandum should also outline the roles and responsibilities of each party. In outlining the parties responsibilities, the sole responsibilities of each organisation should be acknowledged, as well as the collective responsibilities regarding the organisations conduct with each other. The memorandum should contain any potential disclaimers each party wants to include. If there are any joint financial transactions between the parties involved in the memorandum, the specificities of such transactions should be outlined with who pays for what and how it is paid for.

Once the terms and clauses are created, both partners should sign the agreement to start the agreement between the relevant parties. Before doing so, make sure you seek legal advice to ensure that all the terms and conditions are suited for your party and that you are legally protected in case anything goes wrong throughout the duration of the agreement.

Should I get this document reviewed by a lawyer?

A memorandum of understanding is generally not legally binding, so in most cases a lawyer will not be needed. However, to ensure that the memorandum does not become legally binding through the duration of the agreement, it is essential you hire a lawyer to analyse the conditions in order to clarify whether there may be legal ramifications if you breach a term that can to terminate the agreement. Hiring a lawyer will ensure that both you and your company are aware of possible legal ramifications in regards to a memorandum of advice, and will also advise you if there are no possibilities of legal ramifications within the agreement as well.

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