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The First Step: A Memorandum of Understanding

Introduction


Memorandum of Understanding (“MOU”) is normally used where the parties to a proposed commercial arrangement have reached a preliminary agreement but have yet to negotiate the full legal and commercial terms.


A MOU is often designed to be replaced and superseded by a more detailed formal agreement which would then govern the relevant commercial arrangement.


MOUs are like and also known as “Heads of Terms”, “Letters of Intent” or “Term Sheets”.


 

Benefits


An MOU can:


  1. serve as a useful document to help focus the parties’ discussions;

  2. identify and set out the main (head) terms;

  3. show the intent of the parties to proceed with a formal binding agreement; and

  4. reduce the potential for misunderstandings.

Once the MOU is signed, the parties can then negotiate the detail to be set out in a legally binding agreement.


 

Potential Misunderstandings


  1. It is often assumed that because it is called a MOU (and not an ‘agreement’ or ‘contract’) then it is not binding. This is not necessarily the case, and the legal effect of the document will depend upon its content. It is important therefore that each paragraph or clause is specified to be binding or non-binding. For example, a MOU will normally expressly state that the document is non-binding subject to certain paragraphs that are excepted such as a confidentiality provision.

  2. A MOU can take up a disproportionate amount of time as the parties sometimes forget that only the main terms should be included and that the detail will go in a formal agreement. This has even resulted in the parties neglecting to produce a definitive agreement and they have proceeded with their commercial arrangement covered only by the MOU. As MOUs are only incomplete and normally non-binding documents which are meant to be temporary, it is extremely risky not to follow up with a detailed agreement. Relying on a MOU alone can create a very uncertain legal position which can lead to disputes and legal problems.



Conclusion


A MOU should be treated as an incomplete and temporary document whose function is preliminary to a formal binding agreement. It should ensure that the parties are not legally bound by anything except for selected paragraphs/clauses.



This should not be relied upon for legal advice. If you would like any further information or advice please do get in touch




 

 


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