What is a Memorandum of Understanding?

Memorandum of Understanding

A memorandum of understanding (or MOU and sometimes referred as a “Letter of Intent” or “Heads of Agreement”) is generally used in business where parties have come together and identified a project in which they both have an interest.

The MOU is a preliminary step in any discussions focusing both parties minds on key issues allowing these to be worked out and preventing any misunderstandings. All this is useful before time and cost is spent on starting a project or working out the finer details of a contract.

In legal terms despite the labels that the parties may use (MOU/letter of intent/heads of agreement) parties can be at risk of having entered into a contract rather than an MOU.

In the event of a dispute the court will look at the factual matrix of the parties’ relationship to determine the underlying transaction and legal relationship. If the parties had meant to enter into an MOU and have not done so correctly, they may be left with a contract whose terms are vague and which terms would then need to be worked out by the court.

If parties, consider entering into an MOU they should ensure that this is clear in  their arrangements and documents; we set out some helpful tips;

  • The document is headed “Subject to Contract”
  • The parties have expressly said in the document which provisions are intended to be non-binding and which are binding (such as the costs incurred in the project to be the parties own or confidentiality provisions to remain in place when the MOU ends).
  • The parties state in the MOU that the MOU does not create legal relations between the parties.

Whilst parties may take steps to ensure that they do have an MOU, in the event of a dispute or challenge and MOU may still be found to be legally binding if, for e.g., the main elements of a contract (offer, acceptance, consideration and intention to create legal relations) are found to be present. If you are considering entering into a letter of intent or MOU good legal advice at the outset can save arguments and fallout later.

Please contact us for further information.