How a Memorandum of Understanding Works

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.