Articles > Contracts

What Is A Memorandum Of Understanding?

June 17, 2021   Philip Evangelou

A memorandum of understanding is a document that outlines the key terms and frameworks of a commercial arrangement. It is a building block for contracts, usually formed a lot later in the relationship that are far more detailed. A MOU essentially serves as a pivot to facilitate negotiations. It is not a contract that is legally binding, it serves more as an “agree to agree” document. Once again, forming the foundations for more detailed contractual agreements in the future.

When a commercial agreement between two or more parties is in the process of establishment, it is extremely important for all parties involved to set out key terms of your agreement. The overall purpose is to avoid or at least minimise the risk of misunderstandings. It may be too early to put together a formal legal agreement, nonetheless a record of key terms agreed upon should be kept in a document to avoid misunderstandings in the future. In cases such as this, a memorandum of understanding is necessary. The MOU can then be turned into a formal contract once all parties are ready to proceed.

Why Do I Need A Memorandum Of Understanding?

Drafting a MOU creates a document that can be relied on upon further negotiations with a commercial business partner. A MOU will set out your shared goals and expectations. The parties involved in a commercial relationship and what they have agreed on will be stated in a MOU. It can also express goals of the company, the expectations between business partners and other terms relevant to the relationship. A MOU can also serve as a base for future contracts and negotiations. When a company is further down the line and wants to draft up formal documents, then you and your business partners can settle or avoid disputes from a MOU. 

What Is Included In A Memorandum Of Understanding?

The nature of the business relationship will influence the details of your Memorandum of Understanding. However, a MOU has common clauses specifically addressing:

  • The commercial arrangement goal
  • The expectations of each party involved
  • The roles and responsibilities of each party
  • Dispute resolution processes
  • The timeframes that are expected

Key Takeaways

A memorandum of understanding is a document outlining general terms of a commercial agreement. A MOU formats the foundations for far more complex and detailed contracts in the future. Legal advice is very important as it will ensure all parties have a clear and well structured document. An experienced lawyer is highly recommended to draft up a MOU.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.