Memorandum of Understanding
A Memorandum of Understanding (“MOU”) is a nonbinding written document that states the responsibilities of each party to an agreement or contract, before the official contract is drafted. While a MOU is a kind of agreement, there are actually several differences between a Memorandum of Understanding and a formal agreement. An MOU is more of a promise, whereas a contract is a commitment. The following outlines the key concepts in an MOU.
Memorandum of Understanding
A MOU describes the terms of an agreement without being legally binding or involving the transfer of finances. In essence a MOU is outline or proposed understanding to something two parties agree to but have not formally committed to or detailed the specific responsibilities of each party. This includes: an offer; acceptance of that offer; intentions for the project and payment or ‘consideration’ of the terms of the project. A MOU is generally not binding or enforceable in a court of law. A MOU will generally refer to and set out a time frame for the parties to enter into a final binding and legally enforceable contract.
Types of Agreement
An agreement is more straightforward than an MOU in that once an offer is made by one party and accepted by the other, the agreement then becomes a binding promise that the parties have agreed upon. In the event that one party fails to fulfill his end of the agreement, then the other party can take him to court to sue for damages.
The major difference between an agreement and an MOU is that parties will typically go for a MOU if they have no interest in ever involving a court in their affairs. An agreement is made with the express intention to take the other party to court, should the other party breach the terms of the agreement in any way.
How to Write a Memorandum of Understanding
An effective Memorandum of Understanding prevents misunderstandings and potential disputes by clearly laying out the expectations and responsibilities of all parties to the agreement. For example, a Memorandum of Understanding will cover the types of insurance the parties have, including liability insurance, as well as the promises everyone is willing to make and everyone’s level of commitment to the project at hand. If anyone refuses to put anything in writing, then that is a major red flag that should tell everyone involved in the project that perhaps they should not go forward with the arrangement.
Every situation, as well as the parties to it, is unique, and thus so is a Memorandum of Understanding. However, the following elements are general enough and important enough to potentially be included in most MOUs:
- Overall Intent– An example of a Memorandum of Understanding that is well-written is one that begins by outlining the intentions of all who are involved. The overall intent clause must be an exact and clear reflection of the aims of all parties to the agreement. Nothing should be assumed, and there should be no gray area here.
- Parties to the Agreement– All who are involved in the agreement should be specified within the Memorandum of Understanding.
- Time Period– The exact time period of the project should be specified, with both start and end dates.
- Responsibilities– Everyone’s responsibilities and duties should be thoroughly detailed in this section of the MOU so that there are no misunderstandings insofar as who is responsible for doing what. Shared responsibilities should be included here as well, not just individual ones. This is perhaps the most important section of the MOU because it is essentially the reason why the MOU is drafted in the first place. Therefore, this will probably be the lengthiest section of any MOU.
- Disclaimers– If there are any disclaimers that should be mentioned in the MOU, then a separate section should be created to outline them. This is the section where it would be prudent to note what it is the project is supposed to accomplish, as well as what it is not supposed to accomplish.
- Financial Arrangements– In this section, the parties should be specific about who will pay for what, when those payments are due, and who will be receiving those payments.
- Risk Sharing– Risk sharing is another one of the most important aspects of an MOU. Who is going to take responsibility if something goes wrong? What if the project results in an injury or death, or a loss of profit? In this section, the responsible party or parties are to be named only if they are both willing and able to pay for any losses that could result during or from the completion of the project.
- Signatures– While an MOU is not necessarily a legally binding contract, it is still important that it include a section for signatures. Each party should keep a copy of the fully signed MOU for his records.
No matter how iron-clad a MOU may seem, however, the parties involved should still consult with an attorney before proceeding with the terms of the formal agreement or contract. Some courts may uphold a MOU as if it were an official contract, and it is important to verify that all assets are properly protected and that the parties are not sacrificing more than they have to in order to move forward with the project.
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MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding (the “MOU”), dated _______________, 2019, by and between, [PARTY 1] with a business address at [PARTY 1 ADDRESS] and [PARTY 2] with a business address at [PARTY 2 ADDRESS], (Together hereinafter the “Parties”, or separately the “Party”).
A. The Parties wish to enter into a joint project as outlined in this MOU; and
B. The Parties wish to record their understandings and agreements in relation to the proposed project and their various responsibilities for the proposed project;
1. Purpose and Project. This MOU sets out the basic terms upon which the Parties would be prepared to enter into an binding agreement with each other in order to use their respective skills, knowledge and assets for mutual benefit in a joint project consisting of: [Include a statement of purpose, and/or a brief description of expectations, and/or a justification for the project] (the “Project”). The terms of this MOU are not comprehensive and additional terms, including further clarification of areas of responsibility, resources to be committed and reasonable warranties and representations, will be incorporated into a formal agreement (the “Formal Agreement”) to be negotiated.
2. Mutual Understandings. It is mutually agreed upon and understood by and among the Parties that:
a. The Parties agree to work together and co-operate in good faith and to fully participate to develop the project conclude the Formal Agreement;
b. This MOU in no way restricts the ability of either party to enter into any agreement with any other third party in relation to either the proposed Project or any other proposed project of a similar nature;
c. This MOU does not create a binding agreement and will not be enforceable against either of the parties. Only the Formal Agreement, duly executed and delivered by the Parties, will be enforceable, and it will supersede the provisions of this MOU and all other agreements and understandings between the Parties with respect to the subject matter of this MOU;
d. None of the services, financing or resources set out in clauses 4 or 5 shall be deemed to be a commitment of funds and no such funds shall be so committed until such time as the Formal Agreement is concluded; and
e. Neither Party shall have any liability to the other Party in respect to any of the provisions of this MOU.
3. Term and Termination. The understandings and agreements outlined in this MOU shall subsist until such time as the Formal Agreement is completed or until [Enter Date] whichever is the earlier. The term may be extended only by agreement of both Parties in writing.
4. Services provided by the Parties. The Parties agree to work together in good faith in order to ensure the realization of the Project and each party will endeavor to provide the following services in meeting the Project aims:
a. Services to be provided by [PARTY 1]
i. [Enter Services]
b. Services to be provided by [PARTY 2]
i. [Enter Services]
5. Resources Provided. The Parties will attempt to secure all required financing and resources required for realization of the Project goals and will endeavor to provide the following financing, resources, intellectual property and labor:
a. Financing and Resources to be provided by [PARTY 1]
i. [Enter Services]
b. Financing and Resources to be provided by [PARTY 2]
i. [Enter Services]
6. Dispute Resolution. The Parties will attempt in good faith to resolve any dispute arising out of or in relation to this MOU or the negotiation of the Formal Agreement through negotiations between the an appointed person of each Party with authority to settle the relevant dispute. If the dispute cannot be settled amicably within [Enter time frame] [days/weeks/months] from the date on which either Party has served written notice on the other of the dispute then neither Party shall be obligated to enter into the Formal Agreement.
7. Notice. All notices or communications required in this MOU shall be given in writing and must be delivered to the address(es) set forth above (or at such other address as the other Party may direct in writing): (a) in person, (b) by facsimile, (c) by registered mail, or (d) by a commercial courier that provides a signature of receipt. Any such communication shall be effective only upon delivery, which for any communication given by facsimile shall mean the transmission date as confirmed by the facsimile transmission report. A signed receipt for the communication shall constitute proof of delivery, but if the sender can prove that delivery was made as provided for above, then it will constitute delivery despite the absence of a signed receipt. If a communication is rejected or undeliverable through no fault of the sender, notice will be deemed served one business day after the date of attempted service.
8. Entire Agreement. The provisions herein contained constitute the entire agreement between the parties hereto and supersede all previous communication, representations, expectations, understandings and agreements whether verbal or written between the parties or their respective representatives with respect to the subject matter of this MOU and shall not be modified or amended except by written agreement signed by the parties.
9. Governing Law. The provisions of this MOU shall be governed by and interpreted in accordance with the laws of the State of [STATE].
10. Assignment. Neither party may assign or transfer the responsibilities or agreement made herein without the prior written consent of the non-assigning party, which approval shall not be unreasonably withheld.
11. Severability. Should any part of this MOU be declared or held invalid for any reason, that invalidity shall not affect the validity of the remainder which shall continue in force and effect and be construed as if this MOU had been executed without the invalid portion and it is hereby declared the intention of the parties hereto that this MOU would have been executed without reference to any portion which may, for any reason, be hereafter declared or held invalid.
12. Counterparts and Electronic Means. This MOU may be executed in several counterparts, each of which will be deemed to be an original and all of which will together constitute one and the same instrument. Delivery of an executed copy of this MOU by electronic facsimile transmission or other means of electronic communication capable of producing a printed copy will be deemed to be execution and delivery of the MOU as of the date of successful transmission to the other Party.
This MOU shall be effective as of the date first written above.
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Frequently Asked Questions and Resources
What is a contract?
Contracts are defined as written or spoken agreements which are enforceable by law. They can cover any topic or industry, whether sales, tenancy, employment, or otherwise (source).
What are the different types of contracts?
There are many different types of contracts, as defined by upcounsell, those for fixed prices, employment, lump sums, time and materials, unilateral or bilateral contracts, simple contracts and more. Each has its own specific terms, and can either be oral or written and some are non-negotiable (like adhesion contracts) while others have room to be adjusted or amended.
What makes a contract different from an estimate, quote, bid, or proposal?
Mainly contracts are set and finite and legally binding, whereas estimates, quotes, bids, and proposals are possibilities which can be accepted, rejected, negotiated, or ignored altogether. The key difference is that often a bid or proposal will contain terms and conditions that can be signed by the requestor and turned into a contract (source).
What should I include in my contract?
Every contract is comprised of no less than two core components: clearly outlined terms and signed agreement between two separate parties. For more information, read our 12 clauses you should include in every contract.
How should I write an effective business contract?
Contract creation can be challenging, in most cases getting legal counsel is advised to ensure it will be legally enforceable should you require that. Essentially you need basic terms which should be abided by, and an agreement on what product or service is to be provided, to whom, by whom, and what will be tendered with specific terms (such as deadlines, or how the delivery will be completed). For more tips, read our beginners guide to contract writing.
What is the difference between a contract and an agreement?
An agreement is any understanding or arrangement reached between two or more parties. A contract is a specific type of agreement that, by its terms and elements, is legally binding and enforceable in a court of law, according to Diffen.com.
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