What is a Memorandum of Understanding (MOU)?

A memorandum of understanding (MOU) is a formal written agreement between two or more parties. A MOU is used in business and political settings to express mutual understanding and intentions, but is just short of being a legally binding contract.

When is a MOU used?

MOUs are the modern, written version of a traditional gentlemen’s agreement. Also referred to as a letter of intent, they are used in both business and political circles, for a wide variety of purposes. In simple terms, it is merely a written reference of negotiations. Each party listed on a MOU ensures the document explains their specific points of agreement, objectives, and desires. The document also explains each party’s requirements, responsibilities, outcomes, and expectations.

Memorandums of understanding are useful as an addendum to existing contracts. Often used as a written reference for moving forward, it may also outline payment terms and schedules or attach conditions to an agreement such as with property sales.

Is a MOU legally binding?

While not a legally binding document, MOUs are often used as a precursor to legally binding contracts. They’re also convenient to use when one or more parties do not want to, or cannot, enter into a legally binding agreement at the time of the negotiations.

Their non-binding nature is often what makes a MOU useful in various situations. It allows all parties to draw up written documents as a statement of understanding, to reduce confusion or misunderstanding later.

Penning formal written expectations and intentions in this way is also much quicker to finalize for each party. However, the lack of legal backing makes it easier for either party to simply walk away if they choose to without any repercussions.

Is a MOU the same as a MOA?

Sometimes a memorandum of understanding is confused with a memorandum of agreement (MOA) because they’re often used in similar circumstances and their content can be quite similar.

A MOU usually details goals, plans, and intentions in a much broader scope, much like a business or marketing plan. A MOA, however, drills down into specific steps, actions, and timelines similar to a project plan.

What should be included in a MOU?

A MOU does not require any money to exchange hands. Since it’s not a legal contract, there are also no official filing requirements. As it can be the final step before signing an official contract, however, it is important to document everything precisely.

This document should have the date of the agreement and a date of duration. The duration date is simply an agreement as to how much time the agreement will be in effect or when the agreement expires. Additionally, it should note the full name of each party in the agreement.

While a MOU can have as little or as much information included as each party desires, it should generally include a summary or introduction of purpose, relevant terms and conditions, special details, and signatures.

When preparing a MOU, it’s prudent to include as much detail as you can in the interest of protecting all parties. For instance, in writing the purpose of the MOU, it may help to include specific goals and outcomes desired. In the conditions section, consider specifying individual resources and actions committed by each party. You can even add a dispute section to clarify how any disputes will be handled.

It’s worth keeping in mind that the closer your MOU is to a legal contract, the easier it will be to convert it to one in the future if desired.

Once all of the details are in place and the wording is satisfactory to all parties involved, ensure that each party signs the document and keeps a copy for future reference.

A memorandum of understanding can be a useful tool to have in your arsenal when negotiating terms with another party. While not legally binding, it helps set out each party’s intentions, objectives, and responsibilities. By minimizing confusion and clarifying expectations, an MOU can play a key role in establishing a constructive business relationship with another party from the outset.