Memorandum of Understanding (MOU) & What They Achieve : The Ultimate Guide for Beginners

MOU : The Ultimate Guide for Beginners

Hey, What Happened? Didn’t We Sign the Memorandum of Understanding?

After many months of due diligence and engaging in rigorous negotiation, you finally “ink” a contract with your business partner.

You are sitting in your favourite coffee shop enjoying a cup of latte while daydreaming about the brand-new Ferrari that you are going to be able to buy now that your company is thriving. Then suddenly, you get an email that says the deal is off.

So, your fantasy of a lovely Ferrari dissipates as quickly as the coffee in your cup.

Your first thought is, “How can they do that? We have signed the MOU!”

You have obeyed the cardinal “Getting It In Writing” rule and assumed the deal is sealed.

Can you still be left high and dry by the dishonourable reneging party with no legal recourse?

Very often in the business world, legalistic sounding papers like “Memorandum of Understanding” and “Letter of Intent”  are bandied about. But are these documents worth the paper they are printed on? What are the consequences if one party breaches the “Memorandum of Understanding” and “Letter of Intent”?

In many cases, the answer is not much. While a breach of a contract typically results in a lawsuit and the awarding of damages to the innocent party, a breach of a MOU or LOI usually does not. This is because the documents are not legally binding. They are like letters of intent, non-binding agreements to negotiate in good faith.

What Exactly Is A “Memorandum of Understanding”?

  • An MOU is typically used early in negotiations for an intended business transaction between parties. At this point, parties usually have yet to agree on all the essential terms of their transaction but still wish to set out its broad framework.
  • An MOU is a document that outlines the understanding between two or more parties.
  • MOUs are often non-binding because they are preliminary agreements subject to a written contract. This incompleteness usually indicates the parties’ intention  to create legally binding relations only once a formal contract or agreement is enforced.

The common uses of MOUs are:

  • to set out the general intent of the parties to prevent any misunderstandings;
  • to set out the critical points of a complex transaction to help to ensure that all parties are on the same page concerning what is expected of them;
  • to provide safeguards in case the business deal collapses during negotiations;
  • to provide tangible proof of the business deal to potential investors.

What Must A “MOU” contain?

There is no hard and fast rule regarding what should be addressed in an MOU.

As a general rule of thumb, an MOU should include the following information:

  • the general intention of the parties;
  • an overview of the business transaction;
  • the critical points of a complex transaction (e.g. price, quality and deadlines);
  • safeguards in case negotiations fail (e.g. confidentiality, non-disclosure and good faith).

Even though a MOU is not legally binding, it is still an essential document since the MOU records the understanding between the parties of the transaction and their intention.

The purpose of a MOU is to foster collaboration, respect, and understanding among all parties involved in a transaction so that all parties can derive mutual benefit from the transaction.

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