The Memorandum of Understanding outlines the details of the commitments between 2 parties, sharing their resources and services towards a common goal or purpose.
This kind of informal contract works very well in various businesses for the purpose of setting up a partnership or joint venture when the parties wish to form at a later stage an agreement without assuming obligations.
The main benefit to execute an MOU is to be flexible and be able to tailor the contract to the situation of the parties, without necessarily forming a legally binding contract.
Depending on the situation, the parties can opt for a simple and basic MOU stating only the basis of the understanding or in other circumstances, the parties can choose to execute a more detailed MOU in particular if the project is complex and regulated.
As outlined above, the MOU is not a legally binding contract. Its powers and purpose lie in its ability to clearly communicate intent and in the fact that it forms a pact of honor and trust rather than legal ties.
“THE MOU IS MORE FORMAL THAN A
SOLELY VERBAL AGREEMENT BUT NOT
STRONGER AS FORMAL LEGALLY
BINDING CONTRACT”
In this way the MOU is more formal than a solely verbal agreement like a gentlemen’s agreement. However, the MOU is not fully legally binding in the same way as a contract.
Therefore, the MOU can be used for the following purpose:
- Be the first stage to record the understandings of the parties while the formal and binding agreement is in preparation
- Be an agreement to work only for a portion of the project
- Be an arrangement to test the ability and performance of the parties to comply with their obligations.
In these circumstances, you may use an MOU when you do not intent to obligate either party.
