In New York, when parties to a potential business transaction enter into preliminary discussions about a merger or other project, they usually document their objectives and the characteristics of the proposed deal in a memorandum of understanding. Knowing when and why to use this tool and its pros and cons can help you effectively protect your rights and navigate these agreements.
A memorandum of understanding (MOU) formally summarizes the agreement between parties and acts as a non-legally binding expression of intent. Its enforceability depends on its language and the signatories’ intent. It typically signifies willingness to proceed with a contract and negotiations in scenarios from business mergers to international treaty talks.
An MOU’s purpose
In business litigation, an MOU is like a handshake that signifies agreement and progress. It resembles a letter of intent and expresses a commitment to move forward with a mutually beneficial goal. It precedes a binding contract, outlines broad concepts and expectations, reduces uncertainties, and facilitates a smoother execution when the parties eventually sign a binding contract.
What’s inside an MOU
A well-drafted MOU contains an outline of the project or subject of the agreement. It also identifies the involved parties, defines the project scope and specifies roles and responsibilities for each party. An MOU helps the parties negotiate and have mutual understanding while performing due diligence and other work before arriving at a legally binding contract.
An MOU’s pros and cons
An MOU’s advantages include providing a blueprint for objectives, stating expectations, reducing uncertainty and disputes, and facilitating future legally binding contracts. However, an MOU’s non-binding nature allows parties to walk away or modify expectations. Creating an MOU is sometimes resource-intensive, which may become wasteful if the project changes significantly.
How does an MOA differ from an MOU?
An MOU is sometimes confused with a memorandum of agreement (MOA). An MOA takes things one step further by documenting the terms and conditions of an understanding or agreement as described in an MOU. An MOA may contain signatures to demonstrate acceptance of the terms and can be legally binding under certain conditions.
MOUs and MOAs differ in specificity, with MOUs outlining broad concepts and goals, while MOAs provide detailed responsibilities and actions for each party to achieve objectives. MOUs serve as starting points for negotiations, while MOAs outline specific steps and guidelines for the involved parties to complete a project. Parties often use MOAs when money is involved.
Understanding the purpose of an MOU is crucial in business dealings and negotiations. Grasping their purpose and components can help you protect your interests during negotiations.