What Is A Memorandum Of Understanding?

Alias Dictus

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A Memorandum of Understanding between companies is a document like a contract but not binding on the parties, except when confidentiality and non-competition agreements are included. It is essentially a collection of key points of an agreement between two parties that are negotiating a contract; in this respect, a Memorandum of Understanding is simply the agreement signed prior to the final contract. Memorandums of Understanding are also known for its acronym MOU.

Main purposes of a Memorandum of Understanding
Thus, among the purposes of Memorandum of Understanding we can include:

  • The statement that the parties are currently negotiating.
  • Clarifying the key points of an operation for the convenience of the parties.
  • Assess the interest of the other party to carry out the business.
  • Collect the advances that occur in each of the negotiations.
  • Provides guarantees if the deal collapses during negotiation.
The type of Memorandum more used in international negotiations is those related to Distribution and Joint Venture Contracts.

Bidding on parties
In certain complex transactions, the parties may wish to come to a preliminary agreement, sometimes called an “agreement to agree”, which may or not be enforceable, depending on the circumstances and applicable law. Such an agreement may take the form of “Memorandum of Understanding” -also called Letter of Intent or Commitment Letter-. The preliminary agreement may be necessary when a certain major issue (such as obtaining a government authorization) is not yet definitive.

Another function of the Memorandum of Understanding is that the parties will use the preliminary agreement to resolve certain basic issues while continuing to negotiate on more complicated matters.

Differences between Memorandum of Understanding and Letter of Intent
The Memorandum of Understanding is similar to the Letter of Intent, although has three main differences:

  • Use a more formal language similar to the preceding contract, i.e are a summary of the agreement signed before the final agreement.
  • May involve more than two parties while Letters of Intent refers only to two parties.
  • Must be signed by all parties, while the Letter of Intent is signed only by the party that proposes the agreement.