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A memorandum of understanding (MOU) is a document that describes a formal agreement between two parties. It is not a legal agreement, but it does indicate the establishment of a business relationship that will continue and likely result in a legal agreement such as a contract.
An MOU indicates that a legal contract will be forthcoming. This is more expeditious than other forms of documentation and is used both by corporations (usually in high-stakes business dealings such as mergers) and by international agencies or nations (such as during treaty negotiations). Additionally, an MOU may be issued by smaller local businesses and municipalities (counties or townships, for example.)
The MOU is often the starting point for negotiations, and is used to sketch out the purpose and scope of the forthcoming deal and make sure all parties are on the same page.
When the parties have reached an understanding that is acceptable by each of them, the MOU can be used to document all of the most important stances for each party. Although not legally binding, the MOU is a formal document that puts in writing the willingness of all parties to expedite the deal and move the contract forward.
It is also used before or during the negotiation process to define a party’s initial position as a preliminary document that will be modified as the final deal is shaped.
This term is also known as memorandum of agreement (MOA) or as a letter of intent (LOI) in the United States.
Techopedia Explains Memorandum of Understanding
An MOU is a non-binding preliminary agreement that falls somewhere between a handshake deal and a legal contract. An MOU can also be put in place before the formalities of a contract when an agreement between parties has been reached but still requires written documentation.
MOUs are frequently the preferred choice in international relations, particularly when major deals are in the planning stage, because they can be produced expeditiously and with relative secrecy.
MOUs can vary and be tailored to each organization’s or party’s needs. In the initial stages of a negotiation, each party drafts its own best-case scenario MOU with all of the ideal outcomes of a hypothetical deal. This starting position for negotiations includes what that party is willing to offer to the other party or parties, their requests, and which points are open to further negotiation. All of the details that an MOU may include should state or describe:
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Who the partners are and their contact information
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What they are going to be working on, the background of the project and why the MOU is being entered into
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The scope of the document and who will use what the MOU provides
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Specified activities, if already determined
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Implementation of activities
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Funding issues
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Each party’s roles and responsibilities
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A time line, if desired
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Duration of agreement
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A signature and date of signature by all the parties agreeing to the MOU
MOUs can be useful documents to get the ball rolling on major projects and can be used in any type of organization. The very process of finalizing an agreement through sequential MOUs can be used to create a paper trail of the terms that have been proposed during the negotiation.
The non-binding nature of MOUs is at the same time their biggest benefit and their main disadvantage. Since they cannot be enforced, parties can exit the agreement at any time. They can choose to not meet the requirements outlined in the draft without consequences.
While this characteristic of MOUs allows for an easy and painless exit whenever the parties realize that a mutual understanding on the objectives and goals cannot be met, it has also been the cause of some international leaders not trusting MOU-based negotiations.
