You might know it as a “memorandum of agreement” or a “letter of intent.” While it goes by different names, a memorandum of understanding is an important tool for individuals, businesses, and governments to come together and make a good-faith effort to arrive at some sort of consensus or agreement. This blog will explore the uses of a memorandum of understanding in the world of business.
Is a Memorandum of Understanding Similar to a Contract?
Yes, a memorandum of understanding has many features similar to a contract. Like a contract, it provides a general framework for each party’s rights, responsibilities, and obligations. However, unlike a contract, it is not legally binding. A contract not only lists each party’s obligations, but will specify legal repercussions for each side if those obligations are not met. Another way to think of a memorandum of understanding is as a precursor to a valid contract.
What are the Benefits of a Memorandum of Understanding?
To be clear, many business owners and managers don’t put much stock in memorandums of understanding. To them, it doesn’t accomplish anything and takes up time that would be better spent actually drafting a legally enforceable contract. Every situation is different, but not drafting this memorandum is to miss out on some benefits, including:
- It signals an intent for parties to work together, in good-faith, for the purpose of eventually entering into a contract.
- Every party involved can use a memorandum of understanding as a jumping-off point for contract negotiations. Preparing this document can help each side gauge how far apart they are on a deal.
- In some cases, a memorandum of understanding is required before all parties can even consider a contract. This can be effective for high-stakes negotiation — for example, multimillion-dollar merger and acquisition deals between Fortune 500 companies.
- Memorandums of understanding are usually written in plain language without any of the legalese common in contracts. The more casual nature of a memorandum can work to your advantage in the early stage of negotiations.
Conclusion
If you want to ensure that any negotiations leading to a contract for your business are well-structured and have a solid foundation, you could benefit from having a memorandum of understanding in place. If you want experienced legal guidance when drafting agreements for your business, call our firm at 925-399-1529 to discuss your options today.
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