If you are interested in entering into a formal agreement or formal contract with another entity, a Memorandum of Understanding (MOU) is a good document to start with if further negotiations ensue. A Memorandum of Understanding is a preliminary written agreement, though non-legally binding, sets out the intentions of the parties involved and their proposed terms & common vision in the negotiations with consent. After the Memorandum of Understandings commencement date occurs, you will be able to record what has already been agreed on before a legally enforceable document is executed.

As with any business dealing, it is paramount that both parties understand each other's 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.

Additionally, 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 (MOU) if:

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

What does the Memorandum of Understanding cover?

• Limiting the use of confidential information (intellectual property rights);
• Prohibition of duplicating memorandum; and
• Limitation of liability.

Other names for Memorandum of Understanding include:

• Letter of Understanding
• Gentlemen's Agreement
• Memorandum of Agreement
• Heads of Agreement
• Statement of Agreement

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.

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.

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.

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. Overall, if you are looking for a document that is a legally binding contract, a Letter of Intent is a great.

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.

If you find your objectives do not align, exiting the agreement is much easier with an MOU than with a legally binding contract.

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.

Other documents you may need:

• Non-Disclosure Agreement (Mutual)
• Services Agreement
• Consultancy Agreement

Further information

• What's The Difference Between A Memorandum Of Agreement And A Contract?
• What is a Letter of Intent (LOI) and When Should I Use One?
• What is a Bilateral Contract?