In Short
A Memorandum of Understanding (MoU) helps businesses record shared intentions during negotiations without creating a fully binding contract. It can clarify agreed points, reduce misunderstandings, and provide structure while discussions continue. Most MoUs are not legally binding, though specific clauses can be if clearly drafted.
Tips for Businesses
Use an MoU where negotiations are complex or likely to take time, especially with new counterparties. Keep it clear and focused on purpose, scope, and agreed principles, rather than detailed obligations. Be explicit about whether any parts are intended to be legally binding, such as confidentiality or exclusivity, and follow up with a formal contract if the deal progresses.
Summary
This article explains what a Memorandum of Understanding is, how UK businesses can use it during negotiations, and when it may be appropriate. It is prepared by LegalVision’s business lawyers, which specialises in advising clients on UK commercial agreements and contract formation.
Many of your business deals will involve some initial informal discussion before reaching a formal agreement. For example, this may involve you answering a telephone call or meeting the other party for a chat over coffee. However, in more technical business deals, there can be a considerable negotiation period between the initial contact and the signing of a binding agreement. In some circumstances, you can help facilitate business negotiations by agreeing on a Memorandum of Understanding (MoU). This article will explore what an MoU is, why it can be valuable, and whether it is suitable for your business agreements.
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Why is a Memorandum of Understanding Useful?
Before complex agreements, businesses negotiate the parameters of the arrangement. These parameters may include details such as what the product or service is, potential goals, what the monetary exchange will be, and a provisional starting date for the business relationship in the event of successful negotiations. Furthermore, an MoU can help establish a mutual understanding between parties, particularly where the parties have not previously dealt with each other.
It is important to note that an MOU should always be followed up with a more substantial agreement if the parties decide to proceed with their commercial relationship.
What Should a Memorandum of Understanding Contain?
As an MoU is not legally binding, there are no mandatory requirements.
However, some good points to include within the document are:
- the names of your business and the other party;
- the purpose of the negotiations (for example, a potential deal to supply items to the other party); and
- any pre-agreed points between your business and the other party (for example, recording that you have agreed a fixed quote of £10 per item and that negotiations are likely to focus on potential delivery timeframes and quantity of items to be supplied).
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Are There Different Types of Memorandum of Understanding?
Yes, albeit without specific titles, there tend to be informal and formal examples. Let us explore these below.
Informal Memorandum
An informal example would be like the one mentioned above (i.e. setting the stage for negotiations between the parties based on mutual goals). We can refer to this as a pre-negotiation memorandum.
Formal Memorandum
Alternatively, your business could also benefit from a post-negotiation memorandum. This document is similar to a statement of intent and is subject to any final checks the parties may have. This may include due diligence or the involvement of lawyers to draft specific contractual terms between parties.
Example
Let us assume a hypothetical reality TV show where one party is pitching a business idea to an investor. The presentation of a potential business deal to the investor would constitute a pre-negotiation MoU because:
- it is presented within a pre-agreed format (i.e. requesting a specific sum of money for a particular stake in the business);
- it is presented in a pre-agreed format (i.e. in front of 5 business investors); and
- it is an informal negotiation that does not bind any of the parties involved (for example, this agreement is not legally binding for the investors.
Now, assuming the investor verbally accepts a deal on the show, this would amount to a post-negotiation MoU because:
- it is a verbal agreement as to important terms (i.e. the investment on offer); and
- it will allow for due diligence and the final negotiation of a formal document.
Key Takeaways
You can tailor Memorandum of Understanding documents to suit you and your business. Since it is not legally binding, you do not have to include anything specific. However, it is beneficial to include the parties to the agreement, the purpose of the negotiations and any pre-agreed business terms. Essentially, an MoU provides a clear framework for your business and the other party within which negotiations can take place on clear terms, recorded in writing and without ambiguity as to what was agreed.
If you need help with Memorandum of Understanding documentation, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
An MoU is a great starting point for you and the other organisation to agree on points of mutual interest and shared objectives. It is good practice to consider doing so and obtaining legal advice on this. While business deals can be fragile up to the point of legally-binding paperwork being signed, agreeing on some terms in advance with an MoU can be a significant step toward a future agreement.
If you are keen on using one but the other party is not, you can negotiate without one. They are not mandatory legal documents, and many business deals occur without one. However, if you choose to enter into an MoU, the parties may discover significant differences during negotiations.
Yes. Generally, an MoU is not legally binding. However, you can make specific provisions binding if the wording is clear. These may include confidentiality or exclusivity obligations for a set period. Clear wording ensures courts can enforce those provisions if a dispute arises.
It lasts for as long as both sides agree. Often it stays in place until you sign a formal contract or until a set date. Adding an end date can help keep things moving and make sure everyone knows when the MoU stops being in effect.
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