Memorandum of Understanding (MoU)
A Memorandum of Understanding (or ‘MoU’) is a nonbinding agreement between two or more parties. It helps to outline the basic terms and details of an understanding, including each parties’ requirements and responsibilities under the same. It acts as an expression of interest between the parties. An MoU is often the prequel to the formation of a formal contract. An MoU is usually between two companies, a company and a government agency etc. MoUs are also used as tools of international relations between countries or governmental agencies of different countries.
Enforceability of MoU
An MoU, being the prequel to an actual agreement or contract is not enforceable in law, however, this does not make it any less important. It acts as a letter of intent, laying down the intentions of the parties that are to be detailed in the forthcoming agreement. Other than being non-binding, MoUs also do not involve any exchange of money. Both domestically and in the international arena, MoUs are fairly common. They vary in length, form and complexity but always carry the general intentions of the parties. Thus it is a nonbinding agreement that carries in it a future promise to create binding obligations.
Importance of Memorandum of Understanding
Benefits of MoU
- An MoU acts as a precursor to the actual binding agreements between the parties.
- Prior to getting down to the serious business of drafting the main agreement, an MoU allows the parties to explore their future partnership possibilities in a non-binding manner.
- An MoU may be as specific or as general as the parties may wish them to be and helps push the parties in the right direction.
What happens if you don’t opt for an MoU?
While an MoU is nonbinding, its importance cannot be stressed more.
- An MoU holds a great degree of importance because of the time, energy and resources needed to draft an effective and fair document.
- An MoU creates a template for the participating parties to reach a mutual understanding, and in the process, the two sides naturally mediate and figure out what is most important in moving toward drafting the actual agreement.
- Without an MoU, parties may have to spend more time, money and resources in the drafting of the final agreement as they will have no idea regarding the wants and needs of the opposite party.
- An MoU thus ensures there are no surprises from either party at the all important drafting stage.
Checklist for Drafting of Memorandum of Understanding (MoU)
Each party starts with a planning phase where it decides what they want to offer and what they want in return, what is willing to be negotiated etc. An initial draft is then formulated, after which representatives from each party meet to discuss the details and negotiate further.
During this stage of negotiations, the timeline for when the MoU is to take effect are discussed by the parties. A party may put in disclaimers, restrictions or privacy statements, as desired, and in accordance to the type of understanding being entered into. Once discussions are concluded, a final MoU is drafted and signed by the parties involved.
While the formats of MoUs will differ from one subject matter ro another, all MoUs will have certain features in common. Listed below are some common terms/headings to be included in an MoU.
Identification of parties to the MoU: This is the most important part of an MoU, whereby the parties on whom the MoU applies must be clearly laid down.
Purpose/Goals: The MoU must lay down the objectives with which the MoU has been drafted.
Terms & Conditions: An MoU must lay down the terms and conditions on whose basis it has been negotiated. It should read as, “This Memorandum of Understanding (MOU) sets for the terms and understanding between the (partner) and the (partner) to (insert activity).”
Legal status of MoU: This simply states whether or not the MoU is binding. It is uncommon to have legally binding MoUs, however it is always important to clarify the enforceability of MoUs.
Reporting: It should lay down who will evaluate the effectiveness of the MoU, that is how well it is operating, and when such evaluation will take place.
Funding: Preliminary discussions regarding funding may be recorded in the MoU with specific understanding that such a clause does not imply a specific commitment of funds.
Duration: The MoU should lay down the specifics with regards to when the MoU comes into effect and how, and when it terminates, as well as how it may be modified.
Contact information: The contact details of the parties must be clearly set out in the MoU.
Signatures: The signatures of the representatives of the parties to the MoU must be clearly given.
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