A memorandum of agreement or a memorandum of understanding (MOU) is a formal document which describes the broad contours of an agreement that two or more parties have arrived through negotiations. It is not a legally binding document but shows the intention of all parties to move forward with a contract and carries a degree of mutual respect and seriousness.
It is also called the ‘Letter of Intent’ and is simply an “agreement to agree”. It is not unenforceable in all cases; in some MoUs, clauses might indicate an intention to establish a formal contract.
The validity of a memorandum of agreement, may be questioned. However, if it is a contract which has been entered into with the consent of parties in order to arrive at a mutual understanding, the validity would be positively inferred. Typically, all high value agreements such as mergers and acquisition transactions, power purchase agreements etc. have a preliminary memorandum of understanding before the final contract is entered into.
A MOU should ideally follow the basic law of contracts. It makes negotiation easier and helps in quick finalization of agreements.
Who Are the Parties to a Memorandum of Agreement?
From Intellectual Property to Public International Law, MoUs have become the norm. As per common practice, any large commercial transaction, be it multilateral or bilateral, is preceded by an MoU. The smallest of companies to formal governments enter into MoUs on a regular basis, in order to preserve the sanctity and clarity behind any agreement.
MoUs are however, most often used in international relations because, unlike treaties, they can be produced relatively quickly and in secret.
Example: An MoU between the United Nations and a Member State to establish the administrative, logistics and financial terms and conditions to govern the contribution of personnel, equipment, and services provided in support of a peace operation and to specify United Nations standards of conduct for personnel provided by the Government.
What Is the Purpose of the Memorandum of Agreement? Why Do You Need It?
As stated earlier, an MoU is required to lay out the expectations and terms of a to-be binding agreement. The purpose of an MoU is specific to the particularities of the parties and is mostly highlighted in a clause in the document itself. A memorandum example would be:
“The purpose of this Memorandum of Understanding (MoU) is to establish and promote a strategic and cooperative partnership between DuraSpace and EuroCRIS.”
Why should you take the time out to make an MoU?
- It provides increased clarity with regards to the scope of authority of each party. This prevents confusion and misunderstandings while giving effect to already communicated interests.
- MoUs also allow the parties to think about how a future agreement should look like. By gathering experience from the operation of an MoU, parties generally get an idea of what changes should be made while entering into a binding contract; and whether or not entering into a binding contract is a feasible idea in the first place.
What Are the Contents of a Memorandum of Agreement?
A memorandum of understanding template typically contains:
- Dates – The start and end dates are mentioned as a rule in MoUs.
- Contact information – The contact details of all parties relevant to the MoU are important in case any dispute arises.
- Name of project – Businesses often use a Project Name, in place of names of the companies.
- Assignments/Responsibilities – This section of the MOU describes the duties and responsibilities of each party. In many cases, this section of the agreement will be the most detailed and lengthy. Clarifying responsibilities is the number one purpose of a written agreement.
- Disclaimers – It is always worthwhile to disclaim what the partnership is not intended to do, guarantee, or create.
- Financial Arrangements – Where financial implications are involved in the overall intent of an MOU, these should be spelled out in detail including which entity will pay for each item and when payment is due and to whom.
- Risk Sharing – Another critical element of an MOU is a description of who will bear the risk of a mishap. What if something goes wrong? What if the partnership’s activities result in injury, death or a financial loss? A formal MOU may include a provisional clause, promising that Organization A will pay for losses suffered by or caused by Organization B. Ideally, indemnification provisions should be mutual in that each party will be responsible for its own negligent acts or omissions.
- Signatures – A representative from each partner with authority to bind their organizations contractually should sign the memorandum. Each partner should retain a copy of the signed agreement.
How to Draft a Memorandum of Agreement? What Points Should Be Kept in Mind While Preparing an Mou?
The key requirements for a successful and professional memo sample are mutual consensus between the parties, and sincerity to be bound by the document. The following points should be kept in mind while preparing an MoU:
- Only when both parties are on the same boat should an MoU be entered into, in writing. Even though it is not legally binding, differences at the initial stages might affect professional business relations in the future.
- It is generally more effective to describe each organization’s responsibilities separately, beginning with the items that are an organization’s sole responsibility. Each group’s sole responsibilities should be mentioned clearly, followed by a description of shared responsibilities, if any.
- Risk management should always be an essential consideration for the parties; complacency will more often than not lead to conflicts in the future. An important tenet of risk management is that an organization should never assume responsibility for something over which it does not have control.
- Lastly, the agreed points must be reviewed by the parties regularly, till the last minute, before an MoU is entered into. This will only promote trust and healthy business between them.
What Kind of Negotiation Strategy Must Be Followed for a Memorandum of Agreement?
Negotiating a MOU can take a considerable amount of staff time, energy, and resources. The following points must be kept in mind:
- Have a clear agenda for the negotiation meetings; include the staff who would be responsible for executing the agreement.
- Describe your agency, what you hope to demonstrate through case management, why the participation of the provider agency is Important, and how clients will be better served by the joint effort.
- Identify, and clarify your stance at the initial stages. This involves: what you expect, what you’re willing to give up, internal review procedure etc.
What Are the Benefits and Drawbacks of a Memorandum of Agreement?
An MoU increases the confidence and mutual trust between the parties. It also opens scope for business growth with other parties; by establishing your image as a professionally committed organization, you attract similar other members in the market to invest their trust and resources in a common agreement.
The drawbacks of an MoU are:
- Given their non-binding nature, they are not taken seriously by parties and hence lead to conflicts in the implementation stage.
- When a party is not aware of, and not clear about their legal rights in case of violations of the MoU, it often leads to exploitation of interests by the other.
- An MoU is also used as a means to establish the party’s image as a clean and healthy competitor in the market, while the reality might often be the stark opposite. In such cases, MoUs are misleading.
What Happens in Case of Violation of a Memorandum of A?
This clearly depends on the binding power of an MoU. The intention of the parties to enforce the MoU can generally be gathered from the purpose, as stated in the document. Also, legal positions with respect to validity change with a country’s jurisdiction.
In general, three inferences can be made: either the parties intend to be bound immediately by the MoU, or they intend to be bound by a formal agreement, or they intend not to be bound unless a formal contract is executed.
In today’s world of growing professionalism, not only in the business market, but also between private individuals and international agents, the need for clarity in arrangements has increased. With expansion in the scope of areas wherein resources can be invested, complications have arisen. In such scenarios, it becomes crucial to law out in unambiguous terms as to what one party expects from the other, and examine the implementation of such agreements in order to prevent future conflicts in binding contracts. MoUs have provided an opportunity to such parties; by stating expectations, purposes, financial implications, disclaimers etc. at the beginning stages of a relationship, parties are able to enhance mutual trust and healthy business growth. If professionalism is your need from a contract, MoUs are definitely the way to go!