Memorandum of Understanding (MOU) document is a formal agreement between two or more parties to the agreement. It is not a legal agreement but might result in establishing a business relationship between the parties, which might turn out to be a legally enforceable contract. Once there is a mutual agreement between the parties, all the essential instances shall be documented for each and every party. Although it is not legally binding, since it is a formal document, it expresses the parties’ willingness in writing to move the contract forward. In international relations, where two countries may sign an MOU, the countries deal with significant problems and come up with a solution after the planning stage. MOUs can be a useful formal document in major projects and this can be used in different organisations. These are the preliminary agreements used in negotiations between the parties.In this article, we will discuss what MOUs are, its various types and the steps involved while drafting a MOU. 

What does Memorandum of Understanding mean?

Memorandum of Understanding is a mutual agreement between two parties which is non-binding in nature in order to show the common understanding and commitment of responsibilities of an agreement. These are basically used to note down the general understanding of a potential transaction in which the parties want to engage. 

What are the steps involved in drafting an MOU? 

The steps involved are:

• Topic and title - Try to select a proper title for your Memorandum of Understanding. The title must reflect the type of MOU you are using. Some of the MOUs discussed below are the asset purchase MOUs, venture agreement MOUs, service agreement MOUs and so on. 
  
  
• The parties involved - You should mention the fundamental details of the parties involved at the very beginning such as their name, address and so on. 
  
  
• Agreement initiation - While writing an MOU you should mention the tentative date on which the work will begin. 
  
  
• Termination details – At the same time, you should also mention the terms under which the MOU can be terminated. One must also mention the termination date that is the date on which it is to be terminated since it is a one- time contract with a fixed deadline. 
  
  
• Goals and responsibilities involved – In an MOU, it must include the responsibilities, duties, deadlines associated and a valid description of the project should be mentioned. 
  
  
• Scope and values - After determining the scope and project goal and its importance, it must be ensured that all the parties to an MOU must understand the projects long term use and its partnerships. 
  
  
• The key stakeholders - All the key stakeholders, collaboration and partnership should be mentioned in the project. 
  
  
• Timeline – For every deliverables, there needs to have a specific deadline for projects. It should be clearly mentioned in the MOU so that the parties to the contract are aware and able to comprehend.
  
  
• Terms and conditions – All the terms and conditions you wish to add your MOU as per the special requirement must be added to complete the project. Thus, you should mention it in a separate statement of work. 
  
  
• Signatures – Each and every MOU should be signed by all the individuals who are parties to it so that a common understanding between them is achieved. 

What is the difference between MOU and MOA?

Both MOU and MOA (Memorandum of Agreement) are similar in nature. Both are unique to the project, arrangement, and relationship. MOU and MOA can be legally binding if both satisfy the requirements.

Both may seem similar, but there’s a fine line of difference. 

• MOUs are more of a formal agreement than the MOAs that determine the broad spectrum of overall goals. 
• On the other hand, MOAs are more of a conditional agreement and is not always legally- binding. It can be a bilateral or a multilateral agreement between two or more parties. 
• MOUs will be the first step towards understanding between the parties while MOAs are merely an informative document that will review all the details of an agreement. 
• MOAs can be more legally binding than an MOU and keep commitments. 
  
  

When should you use an MOU?

An MOU or memorandum of understanding is used when the parties mutually agree on a specific issue/matter and want to put that agreement into writing, thus creating a relationship that ist not legally binding to it. 

What are the different types of MOUs?

• Joint venture MOU - Also known as co-venture agreement. These are mainly used at the very beginning of negotiations between the parties. It is basically a temporary business agreement between parties to reach a common goal. This agreement will provide the responsibilities of the parties. Joint venture MOUs are of two types- 

1. Contractual Joint Ventures 
2. General Joint Ventures. 
   
   

• Service Agreement MOU – It is a service contract legally binding between the clients and service providers. These agreements will outline the terms and conditions as well. These are also used in the early stages of negotiations which would detail the services that would be necessary for the businesses in a non- binding agreement.
  
  
• Outsourcing MOU – It is generally a contract between a company and a service provider. Service providers are responsible to provide services which the company then outsources. 
  
  
• Asset purchase MOU – It is mainly an agreement between a buyer and a seller that will be used to transfer the ownership of an asset. The seller understands which particular asset to purchase and which to sell in an asset purchase agreement. 
  
  
• Share purchase MOU - These are used for the purchases of shares. One who is a buyer of company’s shares would necessarily want some contractual agreement commonly called warranties that will continue to bind those shareholders even after the sale. 

Conclusion

MOUs non-binding nature can be a benefit to the parties concerned. Due to its non-binding nature it cannot be legally enforced and the parties can exit it anytime. The parties have the choice of not entertaining the MOUs requirements hence won’t be facing severe consequences.  

Also read: 5 smart ways to grow your small business fast

To explore business opportunities, link with us by clicking on the 'Connect' button on our eBiz Card.

Image source: Canva

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy, or position of GlobalLinker.