How a Memorandum of Understanding Works

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.

Why, Oh Why, Use MOUs?

Ultra-formal legal documents such as contracts create tension and complexities that organizations may want to avoid for certain matters.
Ultra-formal legal documents such as contracts create tension and complexities that organizations may want to avoid for certain matters.

Memoranda of understanding are often implemented in private law and international law, and often between both government and non-government agencies and companies. Basically, an MOU is an expression of the intent of negotiating parties.

MOUs are fundamentally an agreement that two parties create before a negotiated document is finalized. That's right -- it's an agreement before an agreement. It's a collection of vital points of accord between two or more entities that intend to establish a working relationship of some sort.

You may wonder why two parties would go to the effort of putting together an MOU, especially considering that it's not an enforceable document. In some cases, a party is legally required to create MOUs, such as when housing authorities negotiate with tenants.

But MOUs hold a lot of potential power because of the time and energy they take to plan and write. They require the parties to come to some sort of mutual agreement, and in order to do that, they have to take stock of their needs and wants and put them to paper.

In these kinds of situations, an MOU is an appealing option because it's simple and direct, without the kinds of complex and combative standard terms and conditions of contract law. In other words, MOUs don't require either side to "lawyer up" and prepare for hard-core, hairsplitting contract talk.

Although each side must put some thought into the MOU, the process for creating one is pretty straightforward. Generally, each party starts in a planning stage to determine what they want or need the other party to provide, what they have to offer, what they are willing to negotiate, and the rationale for an MOU. Perhaps most important, the MOU spells out the parties' common objectives.

After the initial draft is written, representatives for the parties meet in person to negotiate and haggle over the MOU's finer points. Many MOUs spell out communication details, such as descriptions of both parties' capabilities and how they related to each other's' interests. The MOU may also document contact information for each party's representatives, set dates for performance reviews and create processes for dispute resolution.

Other specific terms of the agreement are usually included, too, such as when the agreement begins, how long it lasts and how one or both entities can terminate the MOU. An MOU can also have disclaimers and restrictions, as well as privacy statements. Once they come to an agreement on those details, both parties sign the MOU.

All of these might sound like elements that would appear in a contract, but remember that MOUs are not legally binding. Well, not usually, anyway. This being law, there are always exceptions, and as you'll find out on the next page, if one or both parties aren't paying close attention, contract-flavored memoranda of understanding can leave behind a very bad taste.

The Ties That Bind

Wait, this is a binding agreement? You mean I'm liable for all damages? Calling a contract an MOU doesn't make it so. That's a critical point to remember when you're signing important paperwork.
Wait, this is a binding agreement? You mean I'm liable for all damages? Calling a contract an MOU doesn't make it so. That's a critical point to remember when you're signing important paperwork.

You've already seen the kind of information that's normally included in MOUs. This information often resembles the terms of a legally binding contract, but MOUs typically are not enforceable. However, there are exceptions and stipulations that can spell serious legal consequences for parties who break memoranda of understanding.

For example, if the content of the MOU is exactly like a contract in language and intent, then a court is likely to call it a contract, no matter what title might appear on the front page. This issue arises often, as parties attempt to manipulate the language of an MOU to resemble a contract without the risks of actual contractual obligations.

In another instance, although MOUs aren't binding, they may include provisions that are, such as privacy or nondisclosure agreements. If either party violates such provisions, they may be held liable.

There are standards for determining whether an MOU might be binding. A judge reviewing one would look for four key elements that normally define a contract: an offer, acceptance of the offer, an intention to be legally bound, and consideration (the benefits that each party bargains for as part of a contract).

A judge weighs such factors when determining whether the MOU is actually an enforceable document. If the MOU's terms are clear and coherent, and reinforced by consideration, then a judge would likely find the MOU to be a binding agreement, no matter what it's called. In short, if the parties intend for the entire document to be binding, they should probably opt for a contract instead.

It might sound kind of amusing, or perhaps just redundant, but in many situations, parties are very careful to make sure their MOU can in no way be interpreted as a contract. They do so by including disclaimers and phrases such as "This memorandum is not intended to and does not create any contractual rights between these parties."

Regardless of how cautious the authors might be, MOUs pose risks. In a business environment, these informal agreements lack the formalities and standardizations of a contract that would protect both parties during the project. As a result, legal remedies might be nonexistent in the event of non-performance or a lack of adherence to the MOU.

Those are some of the reasons that a lot of lawyers don't really like MOUs. Without standards, memoranda of understanding are often ambiguous, legally fuzzy documents that can lead to confusion and contentious appearances in court [source: McCormick]. Still, in spite of a lack of love from lawyers, MOUs come in handy in a lot of situations, such as skirting bureaucracy and skillfully limboing under massive amounts of red tape.

What Red Tape?

Formalities and contract standards can create endless rounds of legal negotiations and red tape. The informal processes driving MOUs, however, can expedite agreements on pressing issues.
Formalities and contract standards can create endless rounds of legal negotiations and red tape. The informal processes driving MOUs, however, can expedite agreements on pressing issues.

Bureaucrats like MOUs because the informality of these documents allows them to dodge the kind of scrutiny and red tape that so often plague contracts and treaties. MOUs skirt processes that would slow down implementation and cooperation, thereby helping parties get things done much more quickly than they would through more formal channels.

For example, when multiple government agencies need to define their responsibilities and pool their resources for a project, they often write MOUs instead of contracts, especially when contracts between government divisions are restricted by law. Although some interagency relationships can be formed and maintained by informal understandings between executives and workers, others are more complicated and require a paper trail. That's where MOUs come in.

MOUs are a signed commitment from the agencies to work together in a specified way. For example, when the U.S. Department of Veteran Affairs and the Indian Health Service wanted to better the health care of American Indian Veterans, they signed off on a plan to improve resource sharing and coordination between the two agencies.

Another interagency MOU, between the U.S. Department of Agriculture, the Food and Drug Administration and the National Institutes of Health, was created in 2011 to protect the welfare of laboratory animals. This MOU outlined proper care and use of the animals, and attempted to prevent duplication of efforts between the organizations.

Memoranda of understanding work well between the governments of countries, too, sometimes to expedite an agreement on time-sensitive issues. These documents are used for purposes both dramatic and mundane.

In 1973, the U.S. and Cuba signed an MOU that made the hijacking of airplanes and other vessels a criminal offense. In 1996, Iraq signed an MOU that indicated it agreed with terms of an oil-for-food program, which allowed the country to sell its oil to buy food for its citizens, who were suffering under embargo conditions enforced by the United Nations. In 2004, Brazil and Canada signed an MOU that let each country share best practices with regard to labor inspections, occupational safety, compensation systems and more.

But even in international situations, MOUs aren't binding. They are considered a kind of soft law, which means they are weaker (less enforceable) than traditional "hard" laws but still provide evidence of both parties' intent to follow through on an agreement. Soft laws like MOUs provide an appealing way for countries to cooperate in place of treaties, which are binding and can result in serious international repercussions when broken.

In the U.S., the Securities Exchange Commission has increasingly relied on MOUs to investigate people and companies who work abroad in attempts to flout U.S. financial laws. MOUs help regulators avoid time-consuming treaty procedures and provide a faster, more flexible means of international securities regulation.

Now you know why memoranda of understanding are so widespread. Next, you'll get the low-down on some of the best-known (and maybe even hated) MOUs around.

Famous and Controversial MOUs

Want to avoid losing face in a public debate? You could sign an MOU with your opponent that basically scripts the debate, like John Kerry and George W. Bush did.
Want to avoid losing face in a public debate? You could sign an MOU with your opponent that basically scripts the debate, like John Kerry and George W. Bush did.
Jupiterimages/©Getty Images/Thinkstock

So, say you're a United States presidential candidate preparing for an upcoming debate, but you really don't want to answer or ask any substantial questions. No problem. Just have your lawyers draw up an MOU that outlines a framework for a staged debate.

One of the most famous examples of this happened in 2004, as George W. Bush and John Kerry campaigned for office. Both parties agreed to a 32-page MOU, which controlled many aspects of the debate and let them better manage their public personas.

But not all politicians use MOUs to evade off-the-cuff debate questions; some employ them to prevent war. In 1972, President Richard Nixon and the Soviet Union agreed on an MOU that created a direct telecommunications link between the two sides, with the intent that this system could prevent misunderstandings that might lead to nuclear war.

In 1997, the Clinton administration composed an MOU to update the 1972 Anti-Ballistic Missile Systems Treaty to reflect changes that occurred as the former USSR dissolved into several successor states. This MOU came at a critical juncture, when the world was worried about the security of the former USSR's nuclear stockpile.

In spite of their popularity, MOUs do occasionally draw criticism. In 2008, the U.S. Immigration and Customs Enforcement (ICE) launched a program called Secure Communities, which is designed to help state and local law enforcement personnel identify criminal illegal aliens and deport them.

ICE signed MOUs (often called memoranda of agreement in these instances) with local law enforcement agencies around the country to gain their cooperation. But the agreements came under fire from critics, who called the program a plan to ferret out and deport all illegal immigrants, including those deemed noncriminals.

MOUs play a big role in social issues around the world. The United Kingdom signed an MOU in 2005 to humanely deport unwelcome Nigerians who overstayed their visas or failed to gain asylum. The agreement included terms for safe escort by Nigerian authorities. In other cases, MOUs help people in a quandary. In 2011, Kenya signed an MOU with the United Nations to address the condition of refugee camps within its borders. The document specified security measures and means for delivering goods and services to the impoverished people in the camps.

All of these examples demonstrate how important MOUs have become for business, government and political purposes. And, no matter whether you deem their purposes nefarious or inspiring, MOUs are an established form of written communication that provides a powerful means for pushing through on important business projects, beating deadlines and implementing governmental polices all over the world.

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