A Memorandum of Understanding or (MoU) is an official document that represents an agreement between two or more parties on a common issue. A Memorandum of Understanding (MoU) does not bind the parties involved in the agreement and does not even act as legal evidence in case of the failure of keeping promises mentioned in the Memorandum of Understanding.
A Memorandum of Understanding (MoU) simply represents that two or more parties are willing to work on something together, and it can be referred to as the first step towards getting into a legal contract. A Memorandum of Understanding (MoU) can be drawn on a napkin or can be a detailed written document after the full day meeting between two or more parties. Memorandum of Understanding (MoU) is used often used in international pact negotiations and also used in the business world for merger and acquisition talks.
Most of the time, A Memorandum of Understanding (MoU) is confused with other similar agreements such as Memorandum of Agreement or Letter of Intent. But in legal terms, all of these serve the same purpose, and there is not much difference between them on the legal level. Moreover, In the United States of America, Memorandum of Understanding is a synonym to the Letter of Intent.
Like I mentioned before, Memorandum of Understanding (MoU) can be a concise and small written document, or it can be a long and detailed document, but irrespective of its length and detail it states the mutual expectations of the parties involved along with their acceptance of the expectations mentioned in the Memorandum of Understanding.
A memorandum of Understanding (MoU) is less official than a contract, which means parties can’t sue legally each other if a breach takes place, and it is more formal than a handshake agreement or a gentleman’s agreement.
In the next section, you will learn about how a Memorandum of Understanding works.
How a Memorandum of Understanding (MoU) works?
When two or more parties sign a Memorandum of Understanding, it shows the hint of agreement between the parties involved, and they are willing to move forward and work together. A memorandum of Understanding (MoU) is prepared before signing a final contract. It consists of all the details of the contract before a final legal contract. Therefore, It is not wrong to say that a Memorandum of Understanding is an agreement before a final agreement.
A memorandum of Understanding (MoU) is a straightforward and simple document which states the conditions, needs, and wants of both parties. It is wise to prepare a Memorandum of Understanding rather than just writing pointers plainly on a paper. This makes the conversation between the two parties more formal, and they know they whatever they are saying is being documented, and this makes them pay more attention to the meeting.
Sometimes, a memorandum of Understanding (MoU) is prepared by making notes of a conversation between two parties. This method of writing a Memorandum of Understanding is adopted when two government bodies or senior management of large business organizations interact with each other.
A memorandum of Understanding holds power because of the time and energy invested in the preparation of it and helps in makes the further process smooth and free of any confusion, such as, after the preparation of the first draft, parties can meet and discuss on the points mentioned in the memorandum of Understanding (MoU) to make a final contract and minimize the confusion.
Even though a Memorandum of Understanding is not a legal document but along with negotiable points mentioned by both parties, it also contains information like contact information of both parties, dates for performance review, processes involved for dispute resolution, begins date, and expiry date of the Memorandum of Understanding. Moreover, if you want, you can also include privacy statements, disclaimers, and restrictions on the Memorandum of Understanding (MoU). In the last, it is duly signed by the parties involved.
In simple words, we can say that a Memorandum of Understanding helps in keeping track of everything mentioned in a meeting without missing anything, and it makes the further process of creating a final contract smoothly.
In the next section, you will learn about what is the content of a Memorandum of Understanding.
Content of Memorandum of Understanding
In the previous section, I talked briefly about what should be included in a Memorandum of Understanding. A good Memorandum of Understanding is one that minimizes the confusion and helps in establishing a better understanding between the parties involved.
By taking everything in writing, you come to learn about the integrity of people involved, and you can get a signal if anyone is not comfortable in getting things in written form. Along with the pointers, the other content of the Memorandum of Understanding is also important. The followings are the content elements that are important to be included in a Memorandum of Understanding.
1. Intentions and expectations of Parties Involved in the Memorandum of Understanding
A Memorandum of Understanding must contain the intentions and expectations of all parties involved. Every single intention of each party should be mentioned clearly in the Memorandum of Understanding, and nothing should be left to be assumed. Clearer the pointers better will be the Memorandum of Understanding.
2. Details of Parties involved
The next important thing which must not be skipped in a Memorandum of Understanding is the contact details of parties involved. It should be made sure that details about the parties are correct and duly signed to avoid confusion later.
3. Beginning date of Memorandum of Understanding (MoU)
It is very important to mention a date from when the Memorandum of Understanding will become effective. This will help in avoiding confusion between the parties involved in the agreement.
4. Expiration of Memorandum of Understanding (MoU)
Along with the beginning date, a memorandum of Understanding should also contain the expiration date of the Memorandum of Understanding, which means until when The Memorandum of Understanding will remain effective.
5. Role and Responsibilities of each party
Mention clearly the role of responsibilities of each party involved in the agreement. This will help in avoiding confusion for who is supposed to do what works.
6. Financial Arrangements
This is also an important part of the Memorandum of Understanding (MoU). Most of the time, people don’t bother to mention it in the Memorandum of Understanding and leave it later for the finalized document.
But it is right to include Financial arrangements in Memorandum of Understanding so that it is clear that who is responsible for expenses involved, and what payments are made and what payments are still pending.
If you have any disclaimers, then create a separate section and mention all the disclaimers in detail there. Mention what is not expected to be considered of the part of the deal and what cannot be guaranteed before, after, and during the time when a memorandum of Understanding (MoU) is in force.
8. Methods for dispute resolution
When two or more parties come together to work on something, the chances of disputes increase. The only way to deal with disputes is to have methods decided beforehand to resolve a dispute when it occurs.
It is very important to mention methods to resolve disputes in order to save time.
9. The risk involved and Risk sharing
Mention all the risks involved in the deal and share it with all the parties involved and also mention who is going to be responsible if something goes wrong? And who will take care if injuries take place or someone dies in the process?
Discuss all of these before mentioning it into the Memorandum of Understanding and also mention the name of the party who will take the responsibility.
In the last, getting a Memorandum of Understanding (MoU) signed by all parties involved is most important. A Memorandum of Understanding (MoU) is incomplete if all the parties do not sign it.
After that, a copy of the memorandum of Understanding (MoU) should be given to each party, for they can refer to it in the time of confusion.
Precautions while signing a MOU
Even though a Memorandum of Understanding (MoU) does not bind you legally, but it still has a lot of importance. Whatever you get agrees to is mentioned on a paper in written form and authorized by getting your signature on the paper.
That means you become responsible for what you have said and what you have agreed to. Therefore, it is very important to take precautions before you sign a Memorandum of Understanding (MoU).
- Think deliberately before committing to anything. Don’t commit to anything under peer pressure or provocation. Commit only things that you are sure that you can do in the future.
- Read Thoroughly everything mentioned in the Memorandum of Understanding (MoU) and don’t sign until you clarify your every single doubt. Because later, it can lead to bigger problems and confusion and can cause disputes among the parties involved.
- Get it proofread by your lawyer. Even though a Memorandum of Understanding does not bind you legally, but still it is worth to take the opinion of your lawyer by making him read Memorandum of Understanding (MoU) for you.
- Be attentive during the discussion to know about the risk involved.
- Similarly, you should also be aware of your responsibilities and know what responsibilities you are required to fulfill if you sign the Memorandum of Understanding (MoU).
- Check disclaimers and conditions involved in the Memorandum of Understanding and discuss points that you don’t get agree to and make changes accordingly before you finally sign a Memorandum of Understanding (MoU).