Like HowStuffWorks on Facebook!

How a Memorandum of Understanding Works

        Culture | Lawsuits

When a contract is too formal and a so-called gentlemen's agreement is too casual, a memorandum of understanding might work perfectly.
When a contract is too formal and a so-called gentlemen's agreement is too casual, a memorandum of understanding might work perfectly.

It's the kind of agreement you draw up when you're a tad concerned that your country might be obliterated by nuclear warheads. It's also the sort of document you might scrawl on a bar napkin, outlining a far-fetched business plan after an evening of a few too many White Russians. It's a memorandum of understanding, a legal term that holds major implications for both international and domestic law (and maybe even a few cocktail-stained napkins, too).

A memorandum of understanding (MOU) is, concisely, a written agreement. An MOU is sometimes confused with other, similar jargon, such as letter of intent or memorandum of agreement. For most legal purposes, however, all three of these terms amount to basically the same thing.

MOUs are very common and are used for domestic purposes and agreements between nations. Some are general and concise. Others are long-winded and extremely detailed.

No matter their length or complexity, MOUs specify mutually-accepted expectations between two or more people or organizations as they labor together toward a common objective. And here are two other touchstones of MOUs -- generally they're not legally binding, in part because neither party wants to deal with the ramifications of a binding agreement, and they don't involve the exchange of money.

You might think that memoranda of understanding sound suspiciously similar to contracts, but there are actually significant differences between the two. A contract is a written, private agreement between two parties that is legally binding and can be enforced by a judge.

Contracts spell out the nitty-gritty obligations of each party which, if breached, can spell dire consequences for the entity that breaks it. Contracts are necessary when there is any sort of exchange of money because they help to protect the interests of both parties and ensure trust.

MOUs are less formal than contracts, and typically include fewer details and complexities, but they are more formal than handshake agreements, sometimes called gentlemen's agreements. All sorts of entities use MOUs to create guidelines for each party as they contribute their efforts and resources toward important projects. But ultimately, the reason that parties opt for MOUs is because they are simpler and more flexible than contracts.

Well-written MOUs reflect diplomatic savvy and creative analytical thinking. They also provide a mutually beneficial framework that both entities can work within to achieve shared goals. On the next page, you'll see why memoranda of understanding are virtual celebrities in the legal world.

More to Explore