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written by | September 21, 2022

A Complete Guide on Memorandum of Understanding (MOU)

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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:  

  1. In setting up an MOU, the parties set goals, requirements, etc. 
  2. Both parties draft a Memorandum of Understanding. A consensus is then reached by considering various points made in the draft. 
  3. 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. 
  4. The parties then state their mutually agreed disclosure policy, privacy terms, disclaimers, and confidential information. 
  5. 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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FAQs

Q: Is an MOU Legally Binding?

Ans:

An MOU may be legally binding if it meets all the requirements of a contract. A contract is a legally binding agreement between two or more parties that creates obligations that the parties are obligated to fulfil. For an MOU to be legally binding, it must contain all of the essential elements of a contract, including offer, acceptance, consideration, and mutual intention to be bound.

Q: What Is the Difference Between an MOU and MOA?

Ans:

An MOU is a Memorandum of Understanding, while an MOA is a Memorandum of Agreement. Both are legally binding documents that outline the terms and conditions of a partnership or other business arrangement. The main difference between the two is that an MOU is typically more general while an MOA is more specific and detailed. An MOU may be used to establish an agreement between two parties in which the terms are more broadly written and less detailed than in an MOA.

Q: Can an MOU be changed?

Ans:

Yes, an MOU can be changed. The process for changing an MOU depends on the agreement reached between the parties. An MOU is a nonbinding agreement, so the parties can decide to change the terms of the agreement at any time. However, it is best to put any changes in writing and have all parties sign the revised agreement. This will help avoid any misunderstandings about the new terms of the agreement.

Q: What should be included in an MOU?

Ans:

An MOU should include a description of the business arrangement, the roles and each party's roles and responsibilities, and the MOU's term relevant information. The MOU should be signed by both parties and dated.

Q: What are the benefits of an MOU?

Ans:

An MOU can provide clarity and certainty to the parties involved in a business arrangement. It can help prevent misunderstandings and disagreements by setting forth the expectations each party soles and responsibilities of each party serve as a contract between the parties, which can be enforced in court if necessary.

Q: What is an MOU?

Ans:

A Memorandum of Understanding (MOU) is a legally binding agreement between two parties that sets forth the terms and conditions of their relationship. An MOU can be used to establish a joint venture, partnership, or other types of business arrangement.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.