Have you ever encountered a document that is signed by all parties involved in the transaction but does not have any legal force? A Memorandum of Understanding, or “MOU,” is the name given to this document. It comprises of the assertions of aim of the gatherings in regards to an exchange/bargain. It is generally regarded as an alternative to a “Gentlemen’s Agreement.”
MOU is the best option when the transaction is still in its infancy and the parties only intend to express their intentions in writing rather than immediately entering into a legally binding contract. It gives the parties more time to fully comprehend each other’s terms and conditions and serves as a “negotiation starter.” In addition, parties frequently intend to enter into MOUs in order to reach a conclusion before investing a significant amount of money in due diligence, engaging large law firms, or even beginning the financing process.
Because parties prefer to enter into a MOU to begin negotiations and then shape it into a legally binding agreement or move on to the next stage and enter into a definitive agreement, MOUs are frequently referred to as “agreement to enter into agreement.” In the event that the deal does not come to fruition, this also serves as a shield to shield the parties from a legal commitment.
However, not all MOUs are regarded as “non-binding.” In some instances, MOUs are drafted with the intention of being legally binding contracts in which the parties’ legal commitment and intention can be easily identified. Therefore, the key to determining whether the MOU will be “binding” or “non-binding” is the intention of the parties.
A non-binding written document prior to a contract.” Additionally, it states that the MOU is not intended to be binding and that the parties are free to negotiate with a third party. A memorandum of understanding is rarely enforced by courts, and businesspeople typically intend not to be bound by one. However, courts sometimes conclude that a commitment has been made.
Uses of MOUs and Reasons to Prefer MOUs
You might be wondering why anyone would even bother to draft a MOU Online when it is not even legally binding. In the following circumstances, it makes more sense to sign an MOU than an agreement:
To specify the objectives of the transaction, establish targets, and evaluate performance at the conclusion, government corporations prefer to enter into MOUs.
In international arrangements, MOUs are categorized as treaties. Organizing events Research projects Collaborations Situations in which non-financial exchange is involved to benefit a project Transactions with charitable organizations To build discussion in the deals involving high stakes Moreover, the following are some real-life examples where parties have entered into MOUs instead of a definitive agreement. Ministries, Statutory bodies, and government departments also choose MOUs as a safer option than entering directly into contracts with the other party. Universities
Recent real-world examples of memoranda of understanding
- Flipkart entered into a memorandum of understanding (MOU) with the Ministry of Rural Development (MoRD) of the Indian government to facilitate the integration of local businesses and self-help groups (SHGs), particularly those led by women, into e-commerce.
- The Indian Institute of Technology, Patna (IIT-P) and the University of Newcastle in the United Kingdom have agreed to collaborate on research projects.
- Monday Swiss UK Ltd., a leading European developer and manufacturer of novel plant-based food alternatives, signed a legally binding memorandum of understanding with Zoglo’s Incredible Food Corp. to acquire a 51% stake in Monday Swiss UK Ltd. The non-binding letter of intent (LOI) to acquire a 50.5% interest is superseded by this MOU. “Following extensive due diligence of Monday Swiss, we feel confident entering into a binding MOU,” Zoglo’s CEO stated.
- UltraTech Cement signed a non-binding MOU with Punjab Renewable Energy Systems (PRESPL), India’s largest biomass aggregation and densification company, to scale up the use of biomass in its manufacturing operations.
- Axis Bank offered the Indian Navy a salary package for the defense service in a memorandum of understanding.
- Moderna agreed to provide the African Union with up to 110 million doses of the COVID-19 vaccine.
Benefits of a Memorandum of Understanding (MOU):
- Parties get a head start on the transaction, redefining the terms and conditions, and negotiating crucial issues by entering into MOUs.
- consolidates parties’ intentions: For effective communication and the conclusion of a deal, it is essential to fully comprehend the other party’s intent. Once a non-binding MOU is signed, the parties’ intentions regarding the transaction become clear, and the deal can be closed by either making the MOU a contract or getting rid of it.
- Eliminate Uncertainty: The best method for achieving Consensus ad idem, or a meeting of the minds, among the parties is written communication. Without making a legal commitment, a memorandum of understanding (MOU) is an easy way to write down terms.
- Time needed to get to the end: Parties have enough time to decide whether or not they want to make this intention a legally binding commitment before signing an MOU.
- The foundation of a final contract is: In order for the memorandum of understanding (MOU) to serve as the foundation for a subsequent final, legally binding contract, the parties outlined their intention to enter into a transaction along with the goals and responsibilities they intend to undertake.
- More secure Other option: MOUs are typically regarded as a safer option by government corporations, particularly when major deals are still in the planning stage.
- Effortless exit: The ease with which the deal can be closed is yet another reason to sign an MOU.
Negative aspects of non-binding MOUs include: Parties who are unwilling to fulfill their part of the responsibilities are given the freedom to conveniently exit from an MOU because it is not legally binding. If the other party fails to demonstrate that the MOU was legally binding, it cannot even sue for damages.
- False claims abound: The parties intended for the MOU to be either legally binding or non-binding because it has a flaw. For instance, the MOU makes it abundantly clear that it is not legally binding. One party fulfills its obligation and asserts that the MOU is legally binding, while the other party views it as merely declarations of their intention to enter into a deal. After considering the MOU’s language, courts may or may not enforce it in such a case. Consequently, due to its binding nature, an MOU is highly susceptible to different claims.
- Increased likelihood of litigation: Because of its confounding nature, it might prompt questions between the gatherings and even prosecution on the off chance that debates are not settled among them.