Overview of a Memorandum of Understanding
A Memorandum of Understanding (MOU) is a non-binding agreement between two or more parties that outlines the terms and details of an understanding or negotiation, including each parties’ requirements, demands, and responsibilities.
What Is a Memorandum of Understanding (MOU)?
A Memorandum of Understanding (MOU), as the first stage in the formation of a formal contract, is a non-legally binding agreement between two or more parties outlined in a formal document that sets out the willingness and intent of the parties to move forward with a contract.
A Memorandum of Understanding, or MOU, can be defined as an agreement between parties and can be bilateral (two) or multilateral (more than two parties) and serves as an expression of a common understanding between the parties in question and interprets the intent of a common line of action.
The MOU can be seen as the starting point for negotiations as it defines the scope and purpose of the negotiations between the parties since such agreements are usually used in high-stakes business dealings such as merger talks.
What is the Purpose of the Memorandum of Understanding?
A Memorandum of Understanding (MOU) is an expression of agreement to proceed. It indicates that the parties have reached an understanding and are moving forward. Although it is not legally binding, it is a serious declaration that a contract is imminent and there is a mutual agreement on the content of the upcoming contract.
A Memorandum of Understanding (MOU) clearly outlines specific points and key elements of an understanding between the parties. It names the parties, describes the project on which they are agreeing on, defines its scope, and details each party’s future and current roles and responsibilities.
While not a legally enforceable document, the Memorandum of Understanding (MOU) is a significant step because of the time and effort involved in negotiating and drafting an effective document. To produce an MOU, the participating parties need to reach a mutual understanding. In the process, each side learns what is most important to the others before moving forward.
The process usually begins with each party effectively drafting its own Memorandum of Understanding (MOU) that consists of its ideal or preferred outcome, what it believes it has to offer to the other parties, and what points may be non-negotiable on its side. This is each party’s starting position for negotiations.
To reach a mutual understanding, each party starts with a planning phase in which they decide on the desired outcome, what it can offer, what it is willing to negotiate, and what is non-negotiable. An initial draft is then written, after which representatives from each party meet to discuss the details. Memorandums of Understanding (MOU) often list communication expectations to help the mediation process.
During this time, agreements regarding the timeline for when the Memorandum of Understanding (MOU) takes effect are discussed. Agreements outlining how or when a party can terminate the understanding are also decided. This is when a party inserts disclaimers, restrictions or privacy statements, as desired. Once discussions are finished, a final MOU is drafted and signed.
The contents of an MOU include but are not limited to the scope and intended action of the MOU, the project, and the names of the parties and their respective responsibilities. Other contents include the length of the agreement, when the agreement begins, and when or how either party can terminate the agreement. Also, an MOU can contain contact information for the parties involved and possible dates for performance reviews.
- names of the parties
- the project
- intended action
- Parties roles and responsibilities
- the length of the agreement
- contact information
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- Letter of Intent
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- Share Option Plan
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