This article explains how an MOU works, how it differs from an agreement, and what to think about before signing one.
What is a MOU?
An MOU is fundamentally a pre-contractual document that outlines an “in principle” understanding between future contracting parties in anticipation of an agreement. In particular, an MOU is used when parties anticipate entering into a contract but have not yet done so.
It is essential to keep in mind that an MOU does not always result in a successful agreement being signed by the parties to the MOU. Nevertheless, an MOU is an essential tool for assisting the parties to the MOU in determining whether or not an agreement can be sustained.
Compared to a Terms Sheet and a Heads of Agreement, an MOU serves as the foundation for future contracting parties to reach and sign an agreement. It is similar to a Term Sheet and a Heads of Agreement. An MOU is more adaptable than the other instruments because it is sufficient to set out broad and basic terms of the parties’ preliminary positions. However, all of the aforementioned instruments can be used to guide future contracting parties in the negotiation of an agreement.
Specifically, a MOU doesn’t have to give a rundown of key terms as the premise of future getting gatherings’ discussions, (for example, on account of a Terms Sheet and a Heads of Understanding). This is on the grounds that the substance of the gatherings’ comprehension can fluctuate as per the important realities and conditions during the pre-legally binding stage.
As a result, an MOU’s substantive content varies from case to case. However, the commercial objectives of any future contracting parties, as well as their plans for formalizing those objectives, are typically outlined in an MOU.
Although an MOU may lack specificity, it is advantageous for providing future contracting parties with a broad pre-contractual foundation from which to evaluate their position in the future. An MOU can also give the parties the flexibility to change the main terms of their new agreement based on how their negotiations are progressing.
An example of how to use a MOU is when future contracting parties intend to enter into an agreement but have not yet determined the agreement’s substantive terms, such as final pricing mechanisms, rights, and responsibilities. As a result, a memorandum of understanding (MOU) can be signed by the parties to further negotiate and ascertain the fundamental terms of their subsequent agreement.
In the preceding scenario, a memorandum of understanding (MOU) would be beneficial for documenting the parties’ general intentions and establishing the parameters of how their respective rights and responsibilities would appear in a contract. The MOU would not only direct the parties’ negotiations as they progress; Additionally, it would permit the parties to modify the substantive terms of the agreement with fewer restrictions than in a Terms Sheet or Heads of Agreement, allowing them to materialize their contractual intentions.
When is an MOU appropriate?
Any deal of varying complexities can use an MOU. Specifically, parties to simple deals can use the MOU to formalize an existing agreement and establish their shared goals and objectives. In addition, parties to complex transactions can use the MOU to define their rights and responsibilities prior to negotiating an incoming agreement.
In the event that the parties’ negotiations require the disclosure of confidential information, an MOU may also impose preliminary obligations on the parties, such as confidentiality obligations. An MOU can also impose an obligation for the parties to negotiate honestly in a high-stakes deal to prevent the parties from abandoning the negotiations without good reasons.
Also read: How is a memorandum of understanding document utilized?
Is an MOU binding?
In some cases, an MOU can be enforced. In the end, whether an MOU can be enforced depends on whether it contains contract elements. Additionally, an MOU is likely to be interpreted as enforceable if the terms of the MOU explicitly state that the parties are bound by it.
Parties to an MOU who intend for it not to be enforceable are responsible for ensuring that the agreement’s language appropriately reflects this intention.
As was discussed in this article, a memorandum of understanding (MOU) is useful as a placeholder agreement for parties contemplating or entering into a contract in the future.
Future contracting parties should think about the following when entering into an MOU:
the degree of agreement that existed between the parties at the relevant time of the MOU, which must be documented to ensure that any misunderstandings are adequately addressed when the parties enter into the subsequent agreement;
the MOU’s enforceability, including whether the parties intend for it to be enforceable and whether it accurately reflects the terms;
whether the parties must be bound by preliminary obligations, such as confidentiality or exclusivity obligations.