Loading the player...

What is a 'Memorandum of Understanding - MOU'

A memorandum of understanding (MOU) is a nonbinding agreement between two or more parties outlining the terms and details of an understanding, including each parties' requirements and responsibilities. An MOU is often the first stage in the formation of a formal contract.

BREAKING DOWN 'Memorandum of Understanding - MOU'

A memorandum of understanding (MOU) is not legally binding but is viewed as a serious document by the law. In the United States, an MOU is the same as a letter of intent, which is a nonbinding agreement stating a binding agreement will soon follow. MOUs are most often used as part of multinational international relations because, unlike treaties, they are quick and can be kept secret. However, MOUs can also be used as a tool to modify existing treaties and domestically.

MOUs are common, both domestically and abroad. They vary in length and complexity, but each understanding represents mutually accepted expectations between people, organizations or governments. Other key similarities between all MOUs is they are not legally binding and do not involve the exchange of money.

Legal Ramifications of an MOU

An MOU signals a legal contract is imminent. However, an MOU itself is not legally defensible but should still clearly outline specific points of an understanding. An MOU should describe who the parties are, what the project is they are agreeing on, the scope of the document, each parties' roles and responsibilities and more. While an MOU is not legally binding, it can help two parties move in the right direction toward an agreement.

An MOU, while not an enforceable document, still holds a lot of power because of the time, energy and resources needed to draft an effective and fair document. An MOU forces the participating parties to reach a semblance of a mutual understanding, and in the process, the two sides naturally mediate and figure out what is most important in moving toward an eventual future agreement that benefits both sides.

Basic Process for Drafting an MOU

Each party starts with a planning phase where it decides what is wanted or desired, what can be offered, what is willing to be negotiated and what is off the table. An initial draft is then written, after which representatives from each party meet to discuss the details. MOUs often list communication expectations to help mediate the sides.

During this time, agreements regarding the timeline for when the MOU takes effect are discussed. Agreements outlining how or when a party can terminate the understanding are also decided. This is when a party puts in disclaimers, restrictions or privacy statements, as desired. Once discussions are finished, a final MOU is drafted and signed.

RELATED TERMS
  1. Heads of Agreement

    Heads of agreement is a non-binding document that outlines the ...
  2. Term Sheet

    A term sheet is a non-binding agreement setting forth the basic ...
  3. Party Wall

    In real estate, a party wall is a shared wall that separates ...
  4. Third Party Beneficiary

    A third party beneficiary is a person who will benefit from a ...
  5. Option Agreement

    An option agreement is a legal contract between two parties outlining ...
  6. Discussion Memorandum

    Published by the Financial Accounting Standards Board (FASB), ...
Related Articles
  1. Small Business

    How to Master the Art of Negotiation

    Negotiation is all about coming to an agreement, learn the tactics that good negotiators use to help you get what you want in any negotiation.
  2. Investing

    Party City Holdings: How It's Fared Since Its 2015 IPO (PRTY)

    Learn about Party City Holding's performance as a public company. Investors would have lost much more than the Russell 2000 Index by investing after the IPO.
  3. Investing

    The LLC Operating Agreement Template, And Why You Need It

    For some business owners, creating an LLC offers the best of both worlds. But your state's rules might not suit your needs. Hence the Operation Agreement.
  4. Trading

    An Overview Of Futures, Derivatives, and Liquidity

    Gain an understanding of futures and derivatives, and how these instruments are meant to mitigate market risk.
  5. Investing

    Investment Policy Pitfalls

    An investment policy statement can be a powerful tool - as long as you avoid these common mistakes.
  6. Insights

    Europe Talks Tough on Brexit Deal in Leaked Documents

    The European Parliament wants its way on migrants, money, courts and, most importantly, time.
  7. Retirement

    Healthcare Documents You Need In Place Right Now

    If you become incapacitated, here are some documents that should be in place to say who is authorized to speak on your behalf.
  8. Managing Wealth

    The layoff payoff: A severance package

    If you must leave your job, go out fighting for the best benefits you can get.
  9. Tech

    Are Smart Contracts the Best of Blockchain?

    Smart contracts may be one of the best innovations to accompany blockchain development.
  10. Managing Wealth

    Why You Need a Letter of Intent Will

    A letter of intent is a useful and helpful adjunct to other legally binding documents. If you don't have one, do it now. Here's what should be in it.
RELATED FAQS
  1. How can I cancel a bank draft that I have purchased?

    Learn about a bank draft, how it works, the circumstances under which a bank draft may be cancelled, and what the cancellation ... Read Answer >>
  2. How do you make working capital adjustments in transfer pricing?

    Understand how working capital adjustments are applicable to transfer pricing. Learn about the arm's length standard and ... Read Answer >>
  3. What is the difference between a bill of exchange and a promissory note?

    Learn what bills of exchange and promissory notes are, along with notation of the primary differences between these two documents. Read Answer >>
Trading Center