What is a Memorandum of Understanding (MOU)?
A MOU is an abbreviation for Memorandum of Understanding. It is basically an agreement between the parties. Memorandum of Understanding consist the key points of an agreement between the parties who are involved in negotiating the contract.
A Memorandum of Understanding is just the document which is signed by the parties before the final contract. Undoubtedly negotiations can be very long driven, it is necessary to make clear points on what is being finalized or sorted out by both the parties.
Basically this document underlines the terms and conditions of the parties working together in an agreement, contract or a joint venture. A memorandum of understanding is basically when the parties work towards a common objective, without having any form of binding contract.
Though a MOU is not a contract, it underlines and defines the basic intention of the parties in a contract. Usually this form of agreement is utilized by countries when they enter into international treaties. Several institutions and associations also utilise this to enter into understanding with each other.
What are the Objectives of a Memorandum of Understanding?
The following are the objectives of creating a Memorandum of Understanding:
Clears Intention of the Parties-
One of the main objectives of the MOU is to clear the intention of the parties. Usually entering into legally enforceable contracts between the parties is time consuming. The parties would not want to waste unnecessary time and expense in carrying out this process. Hence drafting a Memorandum of understanding is quite straightforward and clears the intention of the parties.
Underlines work carried out-
The MOU underlines all the work carried out before starting a contract or an agreement between two or more parties. This would spell out the main objectives of the project or the work carried out.
No Legal Guidance Required-
No legal guidance is required to create a Memorandum of Understanding. The MOU can be drafted easily with minimum amount of support.
Even though the MOU does not have any legal effect still the parties of the MOU can state the main intentions. Apart from this, the parties can also negotiate their interests in the contract.
Who uses Memorandum of Understanding?
The following utilize memorandum of understanding:
- Countries- When countries enter into bilateral arrangements or multilateral arrangements, they utilise MOUs. The intentions of the countries entering into a specific arrangement or agreement are expressed in a MOU.
- Organisations- Non-Governmental Organisations and other forms of entities enter into a Memorandum of Understanding. The main intention of entering into such agreement is to clear the main intention of the organisation.
- Companies- Usually before going into a merger agreement, companies would enter into an MOU. This type of MOU used in a typical merger agreement is the term sheet.
- Institutions- Financial and other accounting institutions would enter into MOUs with other organisations to carry out commercial relationships.4
- Government Agencies- Government agencies either into MOUs with government of other states or countries to ensure specific standards are maintained.
Types of Memorandum of Understanding
There are two types of memorandum of understanding. The following are the types of Memorandum of understanding
When exclusive MOU is prepared then parties are kept restrained from agreeing with a similar memorandum of understanding with other entities until the term of first MOU is finished.
There is no form of exclusivity in this form of memorandum of understanding. The party using this form of MOU is free to enter into similar memorandum of understanding with other parties. This form of MOU allows the parties to enter into MOUs with other parties.
How to Write a Memorandum of understanding?
Memorandum of Understanding plays a vital role in specifying the different issues such as final price, when and how the delivery will occur, terms and conditions and specific products between the parties.
While drafting a MOU, the parties have to make sure that the task maintains the agreement and decisions on both the sides. Instead of using complex language it should be written in plain words keeping in mind that the main purpose is to maintain the legitimacy that a verbal agreement would have.
Contents of a Memorandum of Understanding (Memorandum of Understanding Format)
MoU could be a one page document as well as it could contain several pages. There is not a specific format or it. The contents and its form are completely dependent upon the deal that you are going to present to the other party. It ensure that after signing an MOU, parties cannot back out of a deal under any circumstances without facing any consequences. The following are the contents of a typical MOU:
- Name of the Parties
- Project Details
- Scope of the Project
- Term of the Project
- Roles and Responsibilities of the Parties
- Confidentiality Clause
Name of the Parties-
In the first part of the MOU, usually the name of the parties would be included in the MOU. If there are more than one party, then the entire parties name must be included in the MOU.
In the next section, details of the prospective work conducted must be mentioned in the MOU. Any work which has to be carried out by the parties would have to be mentioned under this section.
Scope of the Project-
The scope of the project would include details related to the activities which are covered in the project.
Term of the Project-
The MOU will also contain any relevant details related to the term of the project. This would be stated for how long the agreement or relationship persists between the parties. Any details related to renewal must also be mentioned under this provision.
Roles and Responsibilities of the Parties-
Under this head the roles and respective responsibilities of the parties would be mentioned. What each party is obligated to perform and what they cannot perform must be included here. If there is an issue which leads to deviation from the usual roles, then the same must be mentioned here.
Such clause is incorporated in the MOU if one party wants to maintain confidentiality.
How to use a Memorandum of Understanding?
Once the memorandum of understanding has been written it must be vetted properly. Here it would be useful to consider the services of a professional. Vetting the MOU is an essential step which is required to be carried out. Errors and omissions can be avoided this way. All the vital parts of the MOU must be understood. After the terms have been settled between the parties, it would be crucial to document the same.
The memorandum of understanding is the final document that is made to confirm that both the parties have genuinely achieved an agreement with mutual consent. Preparing this document is not hard; however effort has to be put into the document to ensure that the terms negotiated between the parties have been achieved.
It must cover the essential parts of the conversation by understanding the negotiation and their agreement over the final value, the products, services, how to deliver the product and much more. Once the MOU is created the parties cannot alter the terms of the MOU.
Why Memorandum of Understanding is required?
When the negotiations proceed between the parties, it would be useful to pen down the points which have to be included in the MOU. This would be crucial to the smooth relationship between the parties. Many points which are agreed verbally have to be put down in the form of the agreement. This would be required as the relationship which the parties are entering into depends on the contents of the MOU. Hence, it is essential to document the MOU.
Once the memorandum of understanding is documented, the same can be used in case there is deviation from the usual course of the business between the parties.
What Is The Role of Confidentiality in MOU?
It is essential to understand and analyze the nature and present state of other party with which you are going to negotiate. We all are aware that no party invests without gaining complete knowledge about the other party which is going to invest with you.
If you want to make sure that your information has not been shared with your rival parties then a very important clause known as comprehensive confidentiality must be included in every memorandum of understanding. Before writing a memorandum of agreement you must point a clause which states that all the statements exchanged between the parties will be kept confidential and will never be disclosed in the public.