Full-Form of MOU – Memorandum of Understanding
The full form of MOU stands for Memorandum of Understanding is an agreement between two or more parties signaling an intent of all the parties to move in a common direction concerning an action, is not legally binding and can be construed a step forward towards a formal agreement between the parties.
How Does the MOU Works?
- The memorandum of understanding sets out the responsibilities and expectations of all the parties in the document and promulgating a serious intent towards an action.
- MOUs are used extensively in international relations because they can be formulated quickly and secretly between the concerned parties. Many businesses, government agencies, and departments also use MOUs to move forward in the direction of the goal.
Contents and Format of MOU
When parties come forward to sign a memorandum of understanding, the talks must have reached a stage where parties know what to expect from the relationship and how to proceed in the direction of the goal. Each party may prepare its own set of terms in line with their talks and come up with a joint version of MOU taking into consideration each party’s interest from their documents.
MOUs, commonly have the following contents when they are drafted:
#1 – The Intent
The intent is the description of what the parties intend to achieve from the relationship or partnership. The intent should be straightforward with no ambiguity whatsoever for ease of reference and clarity of purpose.
#2 – Details of the Parties
Each of the parties participating in the memorandum of understanding should have themselves named in this section of the MOU. They could be countries, organizations, institutions, companies or trade bodies.
#3 – Period of MOU
It should then define the period the MOU will be valid for. If for whatever reason the parties are not able to move in the direction of the MOU, the MOU stands ceased at the set date. Memorandum of understanding is not eternal.
#4 – Responsibilities of Parties Involved
Under this section, the responsibilities of each party are laid out in detail. If there are any joint responsibilities, they should also be laid out here. This section should be the most detailed to set out clearly what each party will do to achieve the common goal agreed to in the memorandum of understanding. This section should have details on the resources all parties are expected to have and how will they contribute towards fulfilling their requisite responsibilities proposed in this part of the document.
#5 – Disclaimers
It should have adequate disclaimers laying out any responsibilities, facts, processes that both the parties should distance themselves away from. Any controversial arrangements should be mentioned in this segment for clarity.
#6 – Financials
The financial arrangements for the proposed partnership should be laid out in detail in this segment of the MOU. The payments or investments to be made, revenue sharing to be done, interest to be paid, costs to be borne, etc. should be laid out in this part of the document.
#7 – Risks Sharing
Parties should clearly own the risks that will be borne by them during the partnership. The risks could be within or beyond the control of the respective parties. Irrespective of the nature of the risk, the parties should adequately cover all forms of risk in the MOU. Risks that will be jointly shared should also find a mention in this segment.
#8 – Signatures
Each party or the representatives should sign the memorandum of understanding agreeing to the terms mentioned in the MOU.
The above are the components of a basic MOU. Parties can make it more complex or simple, depending on the nature of the transaction. For example, a memorandum of understanding between two charitable institutions to share space in a building can be extremely simple while an MOU between the two governments on their trade and commerce can be extremely complex running into thousands of pages detailing every part of the proposed arrangement.
When to Use Memorandum of Understanding?
Parties chose to enter into MOU when they need something better than a verbal commitment and less than a formal contract. It is just a formal seriousness pact between parties. Memorandum of understanding can still be a step in the direction of a formal contract if the parties decide to make the partnership which has serious implications. It could also be signed between non-profits as they are considered less threatening than the formal contract.
The purpose of a typical MOU is layout what the parties have agreed to in a formal relationship or partnership. It is better than a verbal commitment, is documented and can be referred to if any of the party digresses from the path laid out in the document. In the absence of an MOU, it is hard to even mutually settle disputes during the course of the arrangement putting the achievement of the end goal in jeopardy.
- A formal document laying out roles responsibilities of all the parties involved
- Better than verbal commitments
- Provides a good reference point in case of disputes
- Lays out of the intent of all the parties towards a common goal
- Convenient and easy to frame than a legally binding contract
- Is friendlier and less threatening than a formal legally binding contract
- Makes it possible to avoid obligations under international law when countries are signing the MOUs
- Absence of legally binding limits the MOU ability to achieve the desired result
- Not all parties may believe in MOUs, in which case there could be a deadlock to talks between parties where nothing could fructify.
- They are widely used and considered to be an important starting point in bilateral and business relationships. Formally written roles, responsibilities, and risks provide clarity on how different situations will be approached during the course of the agreement.
- Some MOUs prove to be just as good as legal contracts, because parties stick to them at all times for the larger mutual benefit, while others flounder because parties do not adhere to them due to diminished viability (in which case it is mutually dissolved) or due to selfish interests of the parties involved.
This has been a guide to the Full form of MOU – Memorandum of Understanding and definition. Here we learn how does the MOU work and when to use along with format, purpose, advantages, and disadvantages. You may refer to the following articles to learn more about finance –