WHAT IS A MEMORANDUM OF

UNDERSTANDING?

A Memorandum of Understanding between companies is a

document similar to a contract but that does not bind the parties,
except when confidentiality and non-competition agreements are
included. It is a document that, lacking a certain formality, aims to
record the will of the parties to carry out in the future, the steps
necessary to carry out a contract that gives way to an international
transaction or business. It results in a declaration of reciprocal wills
with high ethical value for the parties that sign it but without
binding legal effect. In international negotiations it is also known
by its English name: Memorandum of Understanding (MOU).
 MOST IMPORTANT OBJECTIVES OF THE MEMORANDUM OF
UNDERSTANDING

This document basically has five objectives:

• Officially declare that the parties are currently negotiating.

• Clarification of the key points of an operation for the convenience of the
parties.
• Valuation of the interest of the other party to carry out the business.
• Collect the progress that occurs in each of the negotiations.
• Provide guarantees in case the agreement finally fails during the
negotiation.
 LINKAGE BETWEEN THE PARTIES

It is important to clearly differentiate how far the binding

effectiveness of these preliminary deals reaches. Initially, it
should be clarified that they only involve simple personal
dialogues, the drafting of minutes or cross-projects, offers
and counter-offers in which the parties involved do not
betray their intention to bind each other, but that the only
thing they record is to show the possibility of get to hire in
the future. Thus, we can say that they are mere drafts
lacking binding efficacy and only serve as interpretative
elements in the event that the intention of the parties
needs to be known when compliance with the ultimately
agreed business is required.
 HOW A MOU WORK?

• AN MOU IS AN EXPRESSION OF AGREEMENT TO

PROCEED. IT INDICATES THAT THE PARTIES
HAVE REACHED AN UNDERSTANDING AND ARE
MOVING FORWARD. ALTHOUGH IT IS NOT
LEGALLY BINDING, IT IS A SERIOUS
DECLARATION THAT A CONTRACT IS IMMINENT.
 KEY TAKEAWAYS

• A MEMORANDUM OF UNDERSTANDING IS A DOCUMENT THAT

DESCRIBES THE BROAD OUTLINES OF AN AGREEMENT THAT
TWO OR MORE PARTIES HAVE REACHED.
• MOUS COMMUNICATE THE MUTUALLY ACCEPTED
EXPECTATIONS OF ALL OF THE PARTIES INVOLVED IN A
NEGOTIATION.
• WHILE NOT LEGALLY BINDING, THE MOU SIGNALS THAT A
BINDING CONTRACT IS IMMINENT.
• THE MOU IS MOST OFTEN FOUND IN INTERNATIONAL
RELATIONS.
• UNDER U.S. LAW, AN MOU IS THE SAME AS A LETTER
OF INTENT. IN FACT, ARGUABLY A MEMORANDUM OF
UNDERSTANDING, A MEMORANDUM OF AGREEMENT,
AND A LETTER OF INTENT ARE VIRTUALLY
INDISTINGUISHABLE. ALL COMMUNICATE AN
AGREEMENT ON A MUTUALLY BENEFICIAL GOAL AND A
DESIRE TO SEE IT THROUGH TO COMPLETION.
• MOUS COMMUNICATE THE MUTUALLY ACCEPTED
EXPECTATIONS OF THE PEOPLE, ORGANIZATIONS, OR
GOVERNMENTS INVOLVED. THEY ARE MOST OFTEN
USED IN INTERNATIONAL RELATIONS BECAUSE, UNLIKE
TREATIES, THEY CAN BE PRODUCED RELATIVELY
QUICKLY AND IN SECRET. THEY ALSO ARE IN USE IN
MANY U.S. AND STATE GOVERNMENT AGENCIES,
PARTICULARLY WHEN MAJOR CONTRACTS ARE IN THE
PLANNING STAGES.
MEMORANDUM OF UNDERSTANDING WITH CHINESE COMPANIES

It is very common to use them in negotiations with Chinese

companies. Due to the fact that these negotiations are very long and
complex and, on the other hand, Chinese negotiators usually use the
technique of continuously modifying the agreed conditions, a
Memorandum of Understanding must be drawn up at the end of each
meeting that includes the progress and the points on which
agreement has been reached.
Memoranda of Understanding may resemble a contract itself,
but generally do not bind the parties in their entirety, as
mentioned above. However, it is common for Memoranda to
contain provisions that are binding on the parties, such as
confidentiality and non-competition agreements.
 THE DISADVANTAGES OF A MOU

Not everyone agrees on the benefits of an MOU. During trade talks

with a representative of China in Washington in April 2019,
President Donald Trump was asked by a reporter how long he
expected U.S.-China memorandums of understanding to last. "I
don't like MOUs because they don't mean anything," the president
replied. After some discussion, it was decided that any document
that emerged from the talks would be called a trade agreement,
never an MOU.
 IS IT A FINAL AGREEMENT?

• FIRSTLY, A COURT WILL CONSIDER WHETHER THE PARTIES HAVE ACTUALLY

COME TO A FINAL AGREEMENT. OFTEN, PARTIES USE AN MOU WHEN THEY
HAVE COMMENCED A COMMERCIAL RELATIONSHIP BUT ARE STILL
NEGOTIATING SPECIFIC ASPECTS OF IT.
• IF IT IS CLEAR FROM THE DOCUMENT THAT THE PARTIES ARE STILL
NEGOTIATING, A MOU IS PROBABLY NOT LEGALLY BINDING. PHRASES SUCH
AS “SUBJECT TO FURTHER NEGOTIATION” WILL LIKELY INDICATE THAT THE
PARTIES HAVE NOT COME TO A FINAL AGREEMENT. THEREFORE, YOU
SHOULD CONSIDER WHETHER YOUR MOU INDICATES THAT YOU HAVE
REACHED AN AGREEMENT OR THAT NEGOTIATIONS ARE STILL ONGOING.
 IS IT A COMPLETE AGREEMENT?

• TO BE LEGALLY ENFORCEABLE, THE MOU MUST CONTAIN ALL THE ESSENTIAL TERMS OF

THE AGREEMENT. OFTEN, MOUS ARE NOT A COMPLETE AGREEMENT. PARTIES CAN LEAVE
SEVERAL ESSENTIAL TERMS OUT BECAUSE THEY HAVE NOT DECIDED ON THEM YET.
• ESSENTIAL TERMS ARE THE TERMS THAT PARTIES MUST FINALISE BEFORE A COURT CAN
ENFORCE THE AGREEMENT. FOR EXAMPLE, IN AN AGREEMENT BETWEEN A GYM AND A
CLIENT, THE PARTIES MUST AGREE TO THE TIME FRAME OF THE CONTRACT BEFORE THE
AGREEMENT IS BINDING. HOWEVER, DECIDING ON THE BRAND OF THE GYM EQUIPMENT IS
NOT NECESSARY TO ENFORCE THE AGREEMENT.
• ACCORDINGLY, CONSIDER WHETHER YOU HAVE FINALIZED THE ESSENTIAL ASPECTS OF
YOUR AGREEMENT. ASK YOURSELF WHETHER ENOUGH INFORMATION IS PRESENT TO HOLD
THE PARTIES TO THEIR PROMISES.
WAS THERE AN EXCHANGE OF PROMISES?

• FOR THE AGREEMENT TO BE LEGALLY BINDING, EACH PARTY HAS TO PROMISE

SOMETHING OF BENEFIT TO THE OTHER PARTY, IN EXCHANGE FOR SOMETHING ELSE.
FOR EXAMPLE, IN AN AGREEMENT FOR THE SALE OF A CAR, THE BUYER PROMISES
MONEY AND, IN EXCHANGE, THE SELLER PROMISES THE CAR.
• OFTEN, MOUS SIMPLY OUTLINE THE COMMON GOALS AND EXPECTATIONS OF THE
PARTIES. THEY OFTEN USE LANGUAGE THAT INDICATES DISCRETION OF
PERFORMANCE, SUCH AS “PARTY A MAY” RATHER THAN “PARTY A WILL”. WHEN THE
LANGUAGE SUGGESTS THAT A PARTY CAN CHOOSE WHETHER THEY HOLD UP THEIR
END OF THE BARGAIN, THE MOU IS NOT ENFORCEABLE. THEREFORE, CONSIDER WHAT
THE PARTIES HAVE PROMISED EACH OTHER AND HOW CERTAIN THOSE PROMISES ARE.
 DO YOU HAVE THE INTENTION TO BE
LEGALLY BOUND?
• FOR THE MOU TO BE BINDING, IT MUST SUGGEST THAT THE PARTIES INTEND TO BE LEGALLY ACCOUNTABLE FOR
THEIR PROMISES. TO DETERMINE WHETHER THIS IS THE CASE, CONSIDER THE CONSEQUENCES OF A BREACH.
• IF THERE IS A LOT AT STAKE, IT IS LIKELY THAT THE PARTIES INTEND TO RECEIVE LEGAL PROTECTION. IN
ADDITION, LOOK FOR CLAUSES THAT EXPLICITLY STATE WHETHER THE PARTIES INTEND FOR THE LAW TO BIND
THEM. SOME MOUS EXPRESSLY INCLUDE CLAUSES ALONG THE LINES OF “THE PARTIES DO NOT INTEND TO BE
LEGALLY BOUND BY THE ABOVE TERMS”.
• MOUS OFTEN FALL UNDER THE CATEGORY OF PRELIMINARY AGREEMENTS, OR “AGREEMENTS TO AGREE”. THERE
ARE THREE CATEGORIES OF INTENTION CONCERNING PRELIMINARY AGREEMENTS, WHERE THE PARTIES:
• HAVE COME TO A COMPLETE AGREEMENT AND INTEND TO BE BOUND IMMEDIATELY, BUT WANT TO REWRITE THE
TERMS IN A DETAILED DOCUMENT;
• HAVE COME TO A COMPLETE AGREEMENT BUT DO NOT INTEND TO PERFORM THE AGREEMENT UNTIL THEY
WRITE A FORMAL DOCUMENT; AND
• DO NOT INTEND TO BE BOUND BY THE AGREEMENT UNLESS THEY WRITE A CONTRACT.
• THE FIRST TWO CATEGORIES INDICATE AN INTENTION TO BE LEGALLY BOUND BY THE TERMS OF THE
AGREEMENT. IF THE MOU FALLS INTO THE THIRD CATEGORY, THE LAW WILL NOT BIND THE PARTIES UNTIL THERE
IS A FORMAL CONTRACT.
 WHAT IS SIGNIFICANCE OF MOU
• IMPORTANCE OF MOU IS EVIDENT FROM THE FOLLOWING POINTS;
• THOUGH MOU DOES NOT BIND THE PARTIES LEGALLY, BUT, IT CLEARLY OUTLINES
THE UNDERSTANDING BETWEEN THEM BY PUTTING IN RECORD THE BROAD
TERMS AGREED. SO, BY SIGNING MOU, PARTIES BIND EACH OTHER WITH
RESPECT TO AGREED TERMS SO THAT THEY DISCHARGE THEIR RESPECTIVE
DUTIES SMOOTHLY
• MOU BEING A FORMAL DOCUMENT IMPARTS FULL CLARITY ABOUT THE
REQUIREMENTS & RESPONSIBILITIES OF THE PARTIES. IT LAY DOWN THE ACTION
TO BE TAKEN BY EACH ONE TO ACHIEVE THE COMMON GOAL. HENCE, IT BINDS
THE PARTIES MORALLY AND PROFESSIONALLY. ALSO IT MAKES THE
PARTIES ACCOUNTABLE TO EACH OTHER WITH RESPECT TO AGREED TERMS
• IN VIEW OF THE ABOVE AND BECAUSE OF SIGNED MOU IN PLACE, A PARTY SIMPLY
CANNOT BACK OUT FROM ITS COMMITMENTS WITHOUT LOSING ITS FACE
VALUE, RESPECT AND REPUTATION. THIS DEMONSTRATE THE SIGNIFICANCE OF
MOU