MOU | Full Form, Working, Content and Purpose

What is MOU?

MOU is defined as consent between two or more parties or between two or more nations that they are going to agree with each other at later stages. An MOU is a formal document between the parties and it does not need to be a legally binding document. The legality of the MOU will depend upon the nature of the scope defined in the MOU, the language of the MOU, and the person who executes the MOU. The MOU mainly defines the intentions of all the parties concerned in the MOU and all future negotiations shall be based upon the terms and conditions of the MOU. Initially, MOUs are signed between two or more countries when they are negotiating some terms with each other but now the business establishments in our country also work on MOU basis.

Full form of MOU

MOU stands for “Memorandum of Understanding”, and in many countries, it is also known as a “Letter of Intent” or “Memorandum of Agreement”. It is a document that contains the points on which the parties who are negotiating have agreed upon. It is a safer option for the parties to have a MOU to proceed with the agreements later on. Not all the MOUs need to be legally binding, but it depends upon various circumstances. MOU outlines all the terms and conditions that the parties have agreed upon in the negotiations.

How does the MOU Work?

• A Memorandum of Understanding sets out all the points that the negotiating parties have agreed upon, their responsibilities, and expectations from the other party, and it also promotes that the parties work in the direction to achieve the desired result.
• The parties cannot use the MOU to create any legal obligation on the other party as it is only a collection of the agreed points during the negotiation between the parties.
• The parties usually prefer MOUs because it is flexible and very easy to create, and still they cater to the needs of both parties.
• MOUs records all the conclusion that the parties have formulated after the negotiation and have agreed upon.
• The terms and conditions that the parties have agreed upon and mentioned in the MOU must be signed by the concerned parties.
• The parties can make this document enforceable under the law if they follow the conditions mentioned under their contract law.

Contents and Format of MOU

When the parties have reached a stage where they know what to expect from each other and want to execute the MOU by signing the same, they must create a common MOU that has all the intentions of both parties. There are some points that all the MOUs must have discussed below.

1. Details of the parties: The MOU must contain the details of the negotiating parties, it can be two or more than two, depending upon the situation. The parties in the MOU can be anyone who is negotiating the terms and participating in all the discussions, such as Countries, International or national organisations, Companies, and persons.

2. Period of the MOU: The parties must mention a common period till then, the MOU should stand valid. As it is very likely that the parties are not going to perform the activities mentioned in the MOU, it is important to mention the date from which the MOU stands cancelled.

3. The Intent of the MOU: It is very important to mention what the negotiating parties are going to achieve through the MOU. The intent of the parties should always be clear so that it does not create any ambiguity between the parties.

4. Responsibilities of the parties involved: This is one of the most essential elements of the MOU. The responsibilities of each party must be mentioned in the MOU to avoid any future confusion. The roles of the parties in also mentioned in this section, and it also defines how much resource each party will dedicate to achieve their common goal.

5. Disclaimers: In this, all the things need to be mentioned that both the parties have agreed to not perform during the duration of this MOU. It needs to be in clear language so it does not create any confusion.

6. Financials: If any financials are involved in the work-related that is discussed in the MOU, then it needs to be mentioned under this segment. The parties need to mention the exact payment methods and who is going to pay under this section.

7. Risks Sharing: Under this section, all the risks that are going to arise during this MOU need to be mentioned, and which party is going to cater to which need. It is also important to mention if the parties are going to jointly cater to any need.

8. Signatures: The signing authority of each party must sign the Memorandum of Understanding to make them enforceable.

When to Use MOU?

• The parties can mainly use the Memorandum of Understanding when they want to formally create a primary understanding and structure for working together.
• MOUs can help the parties create their objectives, responsibilities, and expectations before they have a formal agreement with each other.
• It helps the businesses to create common terms and conditions for a future partnership.
• Businesses also use MOUs to save the time, resources, and effort that they will spend while creating an agreement.
• It sets out the initial terms on which the parties can further negotiate, and if they want they can bind themselves into a formal agreement.
• When a company wants to close an agreement with another company but is not very certain because of their verbal commitments, they can enter into a MOU.
• The parties often tend to enter into an MOU when they are dealing with any governmental organisation, as it keeps them on the safer side if the negotiations are documented.

Purpose of MOU

1. Documentation: The main purpose of the MOU is to document everything that the parties have agreed upon during the negotiation.

2. Reference: The parties can refer to this document at any stage and point to each other if any of the parties is not following what is mentioned in the MOU.

3. To Avoid Confusion: The verbal arrangement between parties create a lot of confusion, and it is one of the main reason for dispute between them. So, it is better to have written instructions in the form of an MOU.

4. Saves Time and Resources: By having a formal written MOU, the parties can save a lot of their time, energy, and resources.

5. Lesser Disputes: MOUs can be a safer option, and they fulfil the end goal of the parties that they are going to agree without any disputes.

Advantages of MOU

1. Curtails the Risk of Uncertainty: It clearly defines each party’s goals and objectives and removes any risk of uncertainty in understanding the goals of the parties. Both parties will have a proper understanding of the objectives and goals of the MOU.

2. Written Document: It is a written document that has the signature of both parties, so they are obligated towards their duty mentioned in the same. It also ensures that no parties forget what they have agreed upon and what is their obligation towards the MOU.

3. Ease in Exit: It is very easy for the parties to take an exit from the MOU if they find that they are unable to perform the tasks written in the MOU. It is an initial step for a future agreement, so if the party finds out, initially that they are unable to perform the duties mentioned in it, then it is easier for them to take an exit from the MOU without any further delay.

5. Foundation: It acts as the base for any future agreement between the parties. By the MOU, parties have already finalised their initial negotiation, so they can further negotiate or move forward with the agreement based on the terms agreed in the MOU.

Disadvantages of MOU

1. Not Enforceable: The main disadvantage of an MOU is that it is not a legally enforceable document. An MOU does not fulfil all the validity of a valid agreement. Hence, it is not accepted as a legally enforceable document. Any party cannot challenge the validity of the same in a court of law.

2. Confusing Clauses: There are scenarios in which the terms and conditions of the MOU can create confusion for any of the parties, so it is essential to read and understand all the terms and conditions mentioned in the MOU. The parties can clarify each other so they do not have to face any issues in the future.

3. Time Taken for Finalisation: The parties take more than usual time to finalise the terms of the MOU. As the negotiation between parties can take a very long time to finalise, it affects the finalisation of the MOU.