What Is a Written Memorandum of Understanding?
A memorandum of understanding, or MoU, is a non-binding document to show commitment and understanding of responsibilities for an agreement made between two parties. MoUs are essentially used when two parties want to write down their general understanding of a potential transaction they want to engage in.
MoUs are typically made by governmental organizations, non-governmental organizations and corporate entities when partnering with other organizations to document terms and conditions, transactions and negotiations.
Different Types of MOUs
There are different types of MoUs used for different types of contracts or services. Here are some major types of MoUs used by businesses:
Joint Venture MoU
An MoU for a joint venture agreement is used in the early stages of negotiation between two or more parties. It is also called a co-venture agreement. A joint venture agreement is a temporary business contract between two or more parties to help work towards a common goal. The agreement defines all responsibilities of the parties involved.
There are two main types of joint ventures – contractual and general joint ventures.
- Contractual joint ventures take place when two entities partner or collaborate on a project but don't form a separate legal entity to do so. Instead, each entity maintains and keeps their own records of profits and losses.
- General joint ventures are defined as two entities sharing their profits and losses from a specific project. Each party in the agreement has unlimited liability when it comes to the obligations of the agreement. This is often used for real estate endeavors rather than for business ventures.
Service Agreement MoU
A service contract is a legally binding agreement between a service provider and a client which outlines the terms and conditions of the services that will be provided. For example, construction contractors use a service agreement to detail the renovations that they are making to a client's home and to outline how they will be paid for it. Similarly, a business can use a service contract to hire a temporary freelancer or contractor.
A service agreement MoU would detail the services that will be provided to a business in a non-binding document. They are typically used during preliminary negotiations.
Outsourcing MoU
An outsourcing agreement is a contract formed between two or more parties, generally a company and a service provider. The service provider promises to deliver specified services, which is outsourced by the company. All outsourcing MoUs contain the following elements:
- Service expectations
- Any potential penalties and/or awards
- Expected timeframe
- Reviews
- Potential exit strategies
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Asset Purchase MoU
An asset purchase agreement is an agreement between a buyer and a seller used to transfer ownership of an asset for a set price. The seller decides which specific assets to sell and exclude in an asset purchase agreement. These are the key elements addressed in an asset purchase MoU:
- Who is the Asset Purchase Agreement For?
- What Assets Are Being Purchased?
- How much is the asset for?
- Representation and Warranty
- What Needs to Happen Before Closing?
- Miscellaneous Or “Boilerplate” Language
Share Purchase MoU
A share purchase agreement is used during the purchase of shares which is essentially the purchase of a company’s operating business. The buyer of shares of a company generally will want some contractual promises about the company, known as warranties, which will continue to bind the shareholder, who is selling the shares, after the sale. A share purchase MoU discuss the following key elements:
- Warranties
- Share selling terms
- Restrictive covenants
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Business Relationship MoU
A business relationship MoU outlines what each organization agrees to contribute to a partnership, a timeframe for deliverables, details of collaboration, terms and conditions, payments and compensation, etc.
Here are some examples of MoU and when they are used.
How to Write a Memorandum of Understanding – Step by Step
You can write a memorandum of understanding by following the steps listed below:
- Topic and title: Pick a title for your MoU. This should reflect the type of MoU being used. As described above, some common types of MoUs are, venture agreement MoU, service agreement MoU, and asset purchase MoU.
- Parties involved : The beginning of your MoU should include the basic details such as names and addresses of the parties involved.
- Agreement initiation and termination details : Your MoU should mention the effective date of the MoU, when work will begin, and the terms under which it can be terminated. If it is a one-time contract with a fixed deadline, you should also mention the date of termination.
- Goals and responsibilities : The MoU should include a detailed description of the project, the duties, milestones and deadlines associated with it, etc.
- Scope and Values : Outlining the scope or goal of the project along with the values of the institutions can help ensure all parties have an understanding of the long-term use of the project and their partnership.
- Key stakeholders : The key stakeholders in the project, collaboration or partnership should also be mentioned in the MoU.
- Timeline : The MoU outlines the terms of a partnership or collaboration. Sometimes the project also might have deadlines for deliverables. These deadlines should be mentioned in the MoU to reflect that all parties are aware and understand their timelines.
- Terms and provisions : Your MoU can also include special requirements, terms and conditions . If your project, partnership or collaboration has any special requirements or you wish to add terms of completing the project, it should be mentioned in the statement of work.
- Signatures : MoUs need to be signed and dated by all parties involved to reflect an understanding between all parties.
What’s Included in a Memorandum of Understanding Between Two Parties?
These are the key elements present in any MoU:
- Points of understanding: An MOU clearly outlines specific points of understanding. It contains the names of the parties, the project on which they are agreeing, scope and responsibilities, etc.
- Terms and Conditions : An MOU also contains the terms and conditions of the agreement. All parties need to be in agreement of the terms and conditions.
- Party details: The MoU contains the details about all parties involved in the agreement. This generally contains the names, addresses and other contact information.
- Purpose : An MoU clearly describes the purpose of the agreement. It also sets the duties and responsibilities, timeline and important dates for the project being discussed.
- Signatures : All MoUs should have signatures of all parties to reflect an agreement between all parties.
Here is a sample MoU for you.
Who Writes MOUs?
MoUs are generally written by organizations or companies offering the collaboration or partnership. Since companies tend to have their own legal counsel, they can draft an MoU fairly easily. It is advisable to seek a business lawyer or a contracts lawyer who understands federal, state and local laws to draft an MoU. However, you can also draft your own MoU using templates available online.
Get Help with a Memorandum of Understanding
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