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Part 1: What is a Memorandum of Understanding?

A memorandum of understanding (also known as MOU or MoU) is a formal written document between two parties or more, outlining the key terms and details of an understanding or agreement, including each parties’ requirements and responsibilities.

Memorandum of Understanding is not a legally binding contract, yet is often regarded as the first stage in the development of a formal contract. It indicates that the parties involved in the contract are ready to move ahead in a common line of action.

Memorandum of Understanding can be seen as the step one for any negotiations or deals that are taking place. Talks of negotiations occur after both parties have agreed to the memorandum of understanding.

Generally, memorandum of understanding is commonly used in international negotiations between two countries regarding a treaty or a proposition. However, they are also employed in merger talks of two businesses where the stakes are rather high.

Part 2: How Does A Memorandum of Understanding Work?

A memorandum of understanding, in the simplest terms, is used when there is no implication for a legal commitment or where the parties involved are not able to enter into a legally enforceable agreement, yet are interested and willing to proceed further.

It does not mean that the parties have agreed to a contract. However, it indicates that a contract can be expected soon.

A memorandum of understanding can be seen as the same as a letter of intent. In fact, these two are even legally the same in US law and are hardly distinguishable outside of the US law.

They are commonly used in high stake projects and international treaties because they can be created quickly and can be kept a secret among all parties involved.

Part 3: What should be included in an MOU?

An MOU means that all parties involved should have mutual understanding about the project that they are agreeing to discuss. Each MOU is unique, yet generally a MOU shall include:

Parties Involved:

An MOU shall state the parties that are involved in the project.

Scope of Work:

An MOU shall specify the project details and the work scope to clear confusion or doubts. Work schedule should be included within.

Terms of collaboration:

This section should detail the activities to be performed and which partners will perform them, as well as the funds and other resources that each partner brings to the agreement.

Roles and Responsibilities:

The MOU shall also describe the roles and responsibilities of each party towards the other and towards the project. This helps all parties involved understand what is expected of them.

Dispute Settlement:

The MOU shall lay out how each party may resolve disputes if there are any in the long term.

Purpose of the Commercial Partnership and Common Goals:

It’s important to make sure all parties involved are understanding their common goals when entering into the MOU. Purpose of the commercial partnership shall be clearly stated in the MOU too.

Since a memorandum of understanding is only the first step of a proposal showing the intent of all parties involved to move forward, it does not have to include a lot of other components.

Furthermore, since the memorandum of understanding is not legally binding, there is no need to mention any jurisdiction or applicable laws on it.

Part 4: How to Create a Memorandum of Understanding?

Before creating a Memorandum of Understanding, it’s important to make sure if an MOU is suitable for the needs of all parties involved. Each party shall decide what they’re willing to negotiate on by entering into an MOU, and which part of the MOU they’d like to be legally binding.

Once negotiations are completed, parties may set up a timeline regarding when will the MOU take effect, when will it expire, and issues related to its termination, as well as adding restrictions, disclaimers, privacy statements, etc..

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Wrapping Up

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