What is a Memorandum of Understanding in the UK?

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 and whether it is suitable for your business agreements. 

Why is a Memorandum of Understanding Useful?

Before complex agreements, businesses negotiate the parameters of the arrangement. These parameters may include what the product is, potential goals 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 you have not dealt with them.

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 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).

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. request 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 on investors.

Now, assuming the investor verbally accepts a deal in 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 specifically. 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 framework for your business and the other party within which negotiations can flourish.

If you need help with Memorandum of Understanding documentation, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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