A Memorandum of Understanding (MOU) is a type of agreement between two parties that is not legally binding but outlines the responsibilities of each party. An MOU is often used to establish a partnership or joint venture between two organisations. An MOU can be considered a starting point for negotiations as it defines the scope and objectives of the negotiations. Such memorandums are most commonly found in international treaty negotiations.
For example, two countries signed a memorandum of understanding outlining the terms of an upcoming trade partnership.
Did you know?
The MOU is not legally binding, but it helps the parties prepare to sign the agreement by explaining their general concepts and expectations of the agreement. Communicating what each party wants out of the agreement is critical to the smooth execution of future legal contract signatures.
Basics of Memorandum of Understanding (MOU)
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The Memorandum of Understanding (MOU) sets forth the general terms and conditions under which the parties agree to work together. Suppose Company A and Company B will work together to develop and market a new product. The parties agree to share equally the development costs, and each party will retain sole ownership of the intellectual property it creates. Company A will manufacture the product, and Company B will sell and distribute the product. The parties will share equally the profits and losses from the sale of the product. This MOU is effective for two years and may be renewed by the mutual agreements agreeing to keep confidential any information that is not publicly available and marked as confidential at the time of disclosure. This confidentiality obligation will survive the termination of this MOU. The parties agree that this MOU is the complete and exclusive statement of their agreement and that it supersedes and merges all prior proposals, understandings, and all other agreements, oral and written. This MOU may not be amended except in writing and signed by both parties. Each party has signed this MOU through its authorised representative.
What should a Memorandum of Understanding (MOU) contain?
An MOU is a legally binding agreement between two parties that outlines the terms and conditions of their relationship. It is typically used to establish a business partnership but can also be used for other purposes such as establishing a joint venture or setting out the terms of a contract. This process often begins with each party effectively drafting its best-of-MOU. Consider your ideal or desired outcome, what you think you need to offer the other party, and which points are non-negotiable. This is the starting position for each party to the negotiation.
The MOU should include the following:
1. The names and addresses of the parties involved.
2. The date of the agreement.
3. A description of the purpose of the MOU.
4. The terms and conditions of the agreement.
5. The signature of both parties. An MOU is a legally binding agreement, so it is important to make sure that both parties understand and agree to the terms before signing.
If any terms are unclear, it is best to consult with a lawyer before signing the MOU.
Advantages and Disadvantages of an MOU
Advantages
- It can help to avoid misunderstandings and disputes by clearly defining the roles and responsibilities of each party,
- It can provide a framework for resolving disagreements. By clearly stating what each party expects from the other,
- The MOU provides a blueprint for any agreement, whether both parties want to settle it down the road.
Disadvantages
- It can be difficult to enforce, and if one party breaches the agreement, the other party may not have any legal recourse.
- The main drawback of consent forms is that they are not legally binding. Sometimes this can be advantageous, but neither party is obliged to do what they said in their MOU, so they can just walk away or change their expectation.
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Steps Involved While Drafting an MOU
Wondering what are the steps involved for drafting and execution of a Memorandum of Understanding? There is no standard answer to this question since the steps involved in drafting and executing a Memorandum of Understanding (MOU) can vary depending on the parties involved and the purpose of the MOU. However, some common steps that are typically involved in the process of creating an MOU include:
- In setting up an MOU, the parties set goals, requirements, etc.
- Both parties draft a Memorandum of Understanding. A consensus is then reached by considering various points made in the draft.
- Participants set the timeframe for the commencement and completion of the MOU. They also identify certain conditions, including those related to non-compliance, that may lead to the termination of the MOU.
- The parties then state their mutually agreed disclosure policy, privacy terms, disclaimers, and confidential information.
- Finally, the MOU is duly signed and approved by both parties.
Example of Memorandum of Understanding (MOU)
MOU between two companies
Let’s consider the example of an MoU between two companies. Company A and B sign the MoU on 1st September, 2022. Both parties agree to the following terms:
- The project will start from 1st October and will be completed by December 31, 2022.
- Both parties will share equally in the project’s cost up to ₹1,00,000, and the project’s profit will be shared equally between both parties.
- Any disputes that may arise will be resolved through arbitration.
Sample of an MoU
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Conclusion
MOUs are commonly used in business dealings and are often between companies or organisations. They can be used to establish terms for a joint venture, outline the roles and responsibilities of each party, or set out the terms of a proposed contract. MOUs can help clarify the expectations of each party and can prevent misunderstandings down the road. While MOUs are not legally binding, they can be used as evidence in a court of law if there is a dispute. It is important to have a clear and concise MOU that outlines the terms of the agreement and the expectations of each party.
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