MEMORANDUM OF UNDERSTANDING
A memorandum of understanding, or MOU, is a nonbinding agreement that states each party’s intentions to take action, conduct a business transaction, or form a new partnership. This type of agreement may also be referred to as a letter of intent (LOI) or memorandum of agreement (MOA).
If you or your business is in the beginning stages of a transaction with another party, an MOU is often the first step toward a formal agreement via a binding contract. An MOU clearly defines how the parties will work together and lays out each one’s expectations and responsibilities. The goal is to achieve a mutual understanding of the partnership, so you can move forward into an enforceable contract everyone feels confident about.
Benefits and drawbacks of MOUs.
Memoranda of understanding are not enforceable contracts because no offers are presented and no transactions are made. This could be a drawback for partners who have already cemented the details of the transaction and are ready to legally commit.
But for many, it is exactly because they are a step down from a formal contract that MOUs are so useful. An MOU is also one step up from the informal, unwritten “gentlemen’s agreement.” If casual, verbal comments are the most concrete artifacts you have of your potential partnership, a solid next step might be to elevate your conversations with an MOU.
That way you can establish a paper trail and keep negotiations moving forward. Each party has the opportunity to review the terms of the agreement, resolve any disputes or miscommunications, and make changes to the agreement before signing on the dotted line.
Important points to include in your MOU.
Every agreement will look slightly different, but a good rule of thumb is to use MOUs as an agreement to agree, not as the final word. You should include whatever terms you feel are necessary to establish a mutual agreement about the common line of action you both will follow. This often includes:
- Purpose of the partnership
- Goals of each party
- Duties of each party
- Timeline
- Confidentiality clause
- Process for resolving disputes