A memorandum of understanding (MOU) is a document between at least two parties that explains the proposed agreement between them. It is a document that brings together the thoughts and expectations between the parties, expressing a common line of action. An MOU is a more formal alternative to a handshake or gentlemen's agreement.
A memorandum of understanding is sometimes known as a letter of intent. In some states, a memorandum of understanding may become a legal document if both parties sign the agreement.
A Memorandum of Understanding (MOU) is a short written statement outlining the agreement between two or more parties or signatories 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 legal document. 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 or partnership agreement.
A Memorandum of Understanding is sometimes also known as a “letter of intent.” However, this isn’t entirely correct. See our section on “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.
By FormSwift Editorial Team
May 3, 2020
Memorandums of Understanding are somewhat complicated documents that occupy the space between informal non-binding 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.
Individuals and organizations use memoranda of understanding 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 sale of property.
Another form of MOU used in business and for personal reasons is 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 an offering memorandum.
Governments use MOUs within their agencies and in international relations. 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. Under international law, MOUs are considered a type of treaty.
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.
An MOU is not a contract. It's a written agreement of mutual understanding that is more formal than a verbal agreement, but it not a legally binding agreement like a contract. The key difference between an MOU and a contract is how enforceable it is.
An MOU, in other words, articulates mutual understanding 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 has the right to sue.
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 its agreed-upon obligations.
A memorandum of agreement (MOA) is a document that is written between parties to work together cooperatively on a project or objective. It details the obligations and commitments of the parties and allocates each parties' risks. An MOA is legally binding. An MOA is more specific than an MOU.
Because an MOU can be used in practically any situation where the involved parties don't want to enter into a formal contract, they're fairly easy to write provided that you understand the primary components:
Date of agreement: located at the top of the contract, the date of agreement indicates the month, day, and year in which the agreement is made and takes effect.
Introduction: the introduction should provide an overview of the agreement, identify the purpose of the document, parties involved, and why the involved parties are entering into the agreement. The introduction should also offer contact information for each party involved.
Purpose of MOU: this is the reason the MOU is being created. It should detail the subject matter of the MOU. To get a better understanding, run an Internet search for a sample MOU. Read the example sentences so that you may draft your own purpose statement.
Terms of collaboration: this section should detail which activities the project will involve. The activities typically fall within two categories:
Cooperation: the activities performed and which partners will perform them.
Resources: the funds and other resources that each partner brings to the agreement.
Disclaimer: a general statement indicating that all activities that take place under the MOU must be in compliance with both state and federal law.
Conditions of alteration or termination: this section clarifies the conditions and terms under which the MOU can be terminated, altered, or amended.
Dispute resolution: the MOU may create processes for dispute resolution.
Signatures: each party then signs the MOU. If one or more of the parties involved are companies, the CEO, departmental chair, director, or other involved executive of the companies must sign on behalf of the corporation.
MOUs have a unique drafting process:
Planning phase: each party involved determines their wants and what they're willing to negotiate on.
Drafting phase: parties then draft the initial MOU.
Negotiating phase: the MOU typically outlines guidelines that govern the mediation process.
Timeline negotiation: Once negotiations are completed, parties establish a time frame for the MOU to take effect, any end dates, and any rules regarding termination.
Restrictions: finally, each party adds any restrictions, disclaimers, privacy statements, etc., and signs the final MOU.
In order to be legally binding, MOUs must include the following:
Identification: all parties involved are listed by their legal name, address, and business (if applicable).
The MOU must also identify itself as an MOU, not a contract.
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.
Consideration: this section should detail financial obligations--who will keep track of finances, what methods must they use, etc.?
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.
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 is the key factor that determines whether an MOU is binding in the eyes of a court. If the language clearly outlines mutual agreement, the terms of the offer, and is backed by consideration, 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 agreement is to use a legally verified template, either by filling out a 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.
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 enforceable document.
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 a MOU, its proper uses, how it differ from legal contracts, and how to use one.
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