During commercial negotiations, you will likely come across a range of legal documents. One such document is a memorandum of understanding (MOU). A memorandum of understanding, or a ‘heads of agreement’ is a ‘pre-contract document’. Think of it as a framework of all of the key terms and elements you and other negotiating parties intend to include in a later, formal contract. Although MOUs can be used to regulate the international relations of different countries, this article will focus on commercial memorandums and outline some of the considerations you should take into account when forming an MOU. 

What Should a Memorandum of Understanding Include? 

A memorandum of understanding is often used commercially to establish a partnership with other businesses or commercial entities. Therefore, each MOU will be specific to each potential partnership. 

When drafting an MOU, it is essential to keep in mind what you and any other negotiating parties wish to get out of the partnership. It may be useful to include:

  • a description of the parties involved in this partnership;
  • the purpose of establishing this relationship;
  • the goals of this partnership;
  • each party’s role and responsibilities in reaching these goals;
  • any matters that are essential to you, or the other parties involved; and
  • how these parties will resolve any conflicts or disputes that may arise in the partnership. 

How Does a Memorandum of Understanding Differ From a Contract?

On the face of it, a memorandum of understanding may appear to be another type of contract. However, the two types of agreements differ in a range of ways. 

Purpose

The purpose of a contract is to record the legally binding obligations that the two or more contracting parties have taken on. 

On the other hand, MOUs are created to establish a partnership between businesses. MOUs are the ‘stepping stones’ towards this final relationship and record any agreement points or contention throughout the negotiation process. The finalisation of this agreement is reserved for the later, formal contract.  

Intention

To form a contract, all parties involved must intend to create a legal relationship with one another that confers binding obligations immediately upon entry. 

MOUs do not require this same intention. Although an MOU is an excellent way to establish that parties are interested in forming such a relationship, there is no requirement that these parties must intend to enter into binding legal relations. Instead, you can create an MOU to facilitate the negotiations towards a partnership. With an MOU, you can record what each party would like this final relationship to look like. 

Enforceability 

As a contract creates binding responsibilities on all parties involved, such obligations are enforceable by the courts. Consequently, any breach of these responsibilities can result in legal action. Contracts are enforceable because of the the exchange of promises that parties make when entering into a legally binding agreement. This exchange of value is also known as consideration. 

An MOU is usually a non-binding agreement. Hence, any goals or obligations recorded in the document cannot be enforced by the other parties involved. This is because there has been no consideration provided to affirm the terms of the MOU. The parties involved have the responsibility to handle breaches, which is why it is best practice to include a dispute resolution clause when forming an MOU. 

However, a memorandum of understanding can be legally enforceable if the MOU meets the requirements for a binding contract. 

Completeness 

Although drafting and discussion take up time and energy, a contract has to be a complete document. All of the terms in a written contract need to be clear and certain. Any contractual obligations need to be agreed to by all parties involved before entering into the contract. 

In contrast, an MOU can be incomplete, or subject to change. This is because the parties are still in negotiations as to what their final partnership will look like.

Benefits of a Memorandum of Understanding

There is a range of benefits that accompany entering into a memorandum of understanding as it:

  • indicates that all parties are interested in entering into a serious commercial partnership;
  • establishes the mutual goals and expectations you have for such a partnership, without forming binding legal relations; 
  • there is no need to provide any form of consideration as no binding promises have been made; 
  • allows for further negotiations to occur between parties; and 
  • discerns what obligations each party would intend to incorporate into a formal contract. 

Key Takeaways

If you intend to create a legal partnership with other businesses, an MOU can help record your goals and expectations for such a relationship. This allows all parties involved to demonstrate their interest in entering into a commercial partnership and ensures they have a mutual understanding of what this relationship would entail. MOUs are usually not binding. Therefore, if you wish for the obligations contained in an MOU to be legally enforceable, it is best to enter into a formal contract. 

If you are interested in entering into a contract or wish to know whether an MOU can be legally enforceable, LegalVision’s contract lawyers can help. Call us on 0800 005 570 or complete the form on this page.

FAQs

What is a memorandum of understanding?

A memorandum of understanding is a legal document that records the key terms and elements that negotiating parties intend to include in a later, formal contract that would govern their commercial relationship.

How binding is a memorandum of understanding?

A memorandum of understanding is usually not legally binding. However, it may be binding if it contains the key requirements of a contract. These are a clear offer, agreement as to essential terms, consideration and a common intention to create a binding legal relationship with other contracting parties.

What is the difference between an MOA and an MOU?

A memorandum of agreement (MOA) and a memorandum of understanding (MOU) can be used interchangeably to describe the same type of legal document.

What is the purpose of a memorandum of understanding?

The purpose of an MOU is to establish a commercial partnership between negotiating parties by recording the goals and expectations each party has for this relationship.

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