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A Memorandum of Understanding is a legal document that will be used as an agreement between two parties.

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What is a Memorandum of Understanding?

A Memorandum of Understanding (MOU) is a short written statement outlining the agreement between two or more parties who agree to do or not to do certain things moving forward into the future. In the Collins English Dictionary, the document is an agreement between the parties that isn't a legally binding contract. So, while an MOU isn't legally enforceable, it is a written record that often acts as the first step in creating a formal contract.

Other Names

A Memorandum of Understanding is sometimes also known as a “letter of intent.” However, this isn’t entirely correct. See our “MOU vs Letter of Intent” to learn more. Both an MOU and a letter of intent can be used for diplomatic communication between the parties since it serves to ensure that those involved are on the same proverbial page.

The Essential Guide to Using a Memorandum of Understanding

By FormSwift Editorial Team
May 16, 2018 

Memorandums of Understanding are somewhat complicated documents that occupy the space between informal agreements and legally-binding contracts. In this guide, we detail the differences between MOUs and other business agreements, how to write one, and when to use one. With the information provided, you'll be better prepared to utilize MOUs.

When are MOU's Used? 

Common Uses

Individuals and organizations use MOUs in a variety of situations including:

  • Creating a payment schedule: especially if the contract does not specify one.
  • Explaining intentions: organizations may use an MOU to detail their intentions and purpose related to a contract.
  • Outlining conditions of transactions: companies may use MOUs to serve as an addendum to a legal contract--e.g. prenuptial agreement or a scale of property.

Another form of MOUs used in business and for personal reasons include an information memorandum. This document explains the information that the parties have related to whatever situation or project they're involved in. It may also be called a memorandus.

MOU's and Government

Governments may also use MOUs. For example, during the 2004 United States presidential campaign, John Kerry and George W. Bush agreed to a 32 page MOU that created guidelines for their televised presidential debates. In 1972, President Richard Nixon signed an MOU with the Soviet Union that established a telecommunication link between the two countries in order to prevent nuclear war.

The Fans and Opponents of MOU's

MOUs are popular among certain industries and less so among others. Lawyers, for example,  generally do not like MOUs because of their legal ambiguity. Government bureaucrats, on the other hand, like MOUs because they are informal and allow them to avoid the red tape and extended timelines associated with formal contracts.

Memorandum of Understanding vs Similar Documents

MOU vs Contract

An MOU is not a contract. It is technical something that would qualify as informal written communication. It's more formal than a verbal agreement, but they're not legally binding like a contract. The key difference between an MOU and a contract is how enforceable it is.

An MOU, in other words, articulates an agreement that isn't legally binding. It serves as an outline of expectations. A contract, on the other hand, establishes a series of legally binding obligations. If the obligations in the contract aren't met, the party that was injured by the unfulfilled contract generally have the right to sue.  

MOU vs Letter of Intent

These documents are very similar. In fact, MOUs are sometimes referred to as letters of intent. Like a letter of intent, an MOU outlines an agreement between parties and is usually created in advance of a formal contract. The primary difference between an MOU and a letter of intent is that a letter of intent is never legally binding. Technically, an MOU can be legally binding if one party relied and acted upon the agreement and lost money or was otherwise injured because the other party did not meet their agreed upon obligations.  

Legal Considerations of an MOU

When are MOU's legally binding? 

In order to be legally binding, MOUs must include the following:

  1. Identification: all parties involved are listed by their legal name, address, and business (if applicable).
  2. The MOU must also identify itself as an MOU, not a contract.
  3. Intention: the MOU must clearly identify the purpose of the agreement. Furthermore, there should be separate sections for the intentions and goals of each party.
  4. Consideration: this section should detail financial obligations--who will keep track of finances, what methods must they use, etc.?
  5. Acceptance: All involved parties must sign the MOU.

With each of these sections in place, if the language of the MOU clearly outlines the terms of the agreement and is backed by consideration, the MOU may be treated like a contract and may be legally binding.

If you are worried about accidentally making a legally binding MOU, include a statement like this:

  • "This memorandum is in no way a legally enforceable contract between the aforementioned parties."

If, however, you want a legally binding MOU, be sure to use clear, specific language.

The best way to create an MOU that is also cost efficient is to use a template.

The Breaking of an NDA or Privacy Agreement

MOUs often contain legally binding clauses, such as non-disclosure agreements or privacy agreements. These types of clauses are always legally enforceable. You could face legal consequences if you break one. It should be noted that the presence of a legally enforceable clause in an MOU does not make the entire document legally enforceable. Here is an example of a legally enforceable clause:

The aforementioned will not, unless so authorized or required by the duties mentioned within, reveal or divulge to any person or entity any information concerning the affairs of Business, Ltd., or the affairs of any of Business, Ltd.’s subsidiaries. This restriction is unlimited and will only cease to apply to information that becomes public domain.

Language

Language is the key factor that determines whether an MOU is binding in the eyes of a court. If the language clearly outlines the terms of the offer and is backed by considerations, the MOU will function like a legally enforceable contract even though it technically is not a contract. However, there are statements that can negate the enforceability of an MOU. Here is an example of one of those negating statements:

"This memorandum is in no way a legally enforceable contract between the aforementioned parties."

Only clear, specific language will make the terms of your MOU stand up in court. So, if you’re creating an agreement in which you want a legal edge without incurring any edges against your own interests, gear the terms in such a way that they absolve you of potential blame, and try to insert whatever binding clauses you deem necessary.

A great way to monitor the potency of your MOU is to use a legally verified template, either by filling out a free memorandum of understanding template or creating your MOU based on a sample memorandum of understanding. Both of these tools can be found on the internet, though we recommend you do some background research and be sure you are using a reputable site.

A Few Final Thoughts

Remember: MOUs do not always involve the exchange of money. Any MOU that does involve the exchange of money is almost always considered a legally binding contract.

Conclusion

MOUs occupy a somewhat nebulous legal space in the business world. Yet, they are also important documents for any individual or business. We hope this guide clarifies the legal standing of MOUs, their proper uses, how they differ from legal contracts, and how to use one.

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