MOU: Getting into a Mutual Understanding
Memorandum of Understanding or more popularly known as an MOU is an agreement, which is made between two or more parties, when they wish to lay out the rights and obligations of the parties, and thereby, agree on a course of action to reach a valid and a common conclusion. This is an agreement between the parties outlined in a formal document, although not legally binding but is an effective document that signals the willingness of the parties to the contract. The MOU is primarily considered as the document which initiates the negotiations between the parties and this document substantiates the scope of such negotiation or any course of action which the party aims to achieve. These MOU are used in international businesses involving high-stakes dealing. These businesses sign the MOU for initiating further action on the decision task. The main crux of drafting the MOU is only to specify the broad scope regarding the talk which the parties have reached outlining the key provisions which have been mutually accepted by the parties.
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Elements of MOU
While drafting the MOU, some of the content which is expected from the parties has to be mentioned in the MOU to be very clear with the scope of the same. MOUs are less time consuming, and since it is not legally binding, the parties avoid the legal implications altogether, as opposed to a contract. This is majorly attributable to the fact that a legal agreement between parties contains the undertaking of the risks, warranties, and indemnifications due to the nature of the contract involving the exchange of money or any other considerations.
As specified, the MOU is not legally enforceable and hence they consume less time and effort which involves negotiating and drafting. The parties don’t tend to create any such legal obligation and hence such type of agreement is most sought. The most important thing needed is reaching a mutual understanding between the parties and drafting the best-suited MOU. The information contained in the MOU provides all the information with the aim of the work being done. What is the role of the party and what will the party offer to the other, will be crucial information being shared through the MOU. Finally, communication must be done regarding the agreement reached through mutual understanding of the parties.
As with any other type of agreement like that of partnership or the JV, mostly the content for every such agreement remains the same. In the MOU, the details of the parties must be mentioned which includes the address and other information. The context of the agreement being reached mutually will come in defining the scope of the agreement. The scope of the agreement will also outline the basic purpose of the agreement. As stated earlier, it will contain the obligation of the party and the expectation from the parties. Since this agreement is not legally bound, it need not contain any such liabilities concerning the parties.
The date on which the agreement is being entered and when will the agreement be terminated must also have a clear mention in this regard. Such drafting of MOU also helps the parties to understand the compatibility while working with each other and such MOU can be a guiding factor for framing a legally binding contract in the future. This also helps in resolving any such dispute which might have caused more damages if it would have been a legally binding contract.
There is a basic difference between the Memorandum of Understanding and the Memorandum of Association. An MOU is a document that describes very broad concepts of mutual understanding, goals, and plans shared by the parties. In contrast, an MOA is a document describing in detail the specific responsibilities of, and actions to be taken by, each of the parties so that their goals may be accomplished.
Since the MOU is not legally binding, the parties can change their motive and expectation and can move away without any such legally binding motive. In such cases, framing an MOU can be a big waste of resources, since no parties can legally claim it. But on the other hand, the MOU can be of great help for parties who wish to enter into a legally binding contract in the future. This will help them to understand the objectives and compatibility, thereby providing an effective idea of how this mutual understanding can be advantageous.
Author: Saransh Chaturvedi (an advocate) currently pursuing LLM from Rajiv Gandhi School of Intellectual Property Law (IIT Kharagpur). In case of any queries please contact/write back to us at support@ipandlegalfilings.com.
