This article is written by Nikhil Sharma who is pursuing a Certificate Course in Commercial Contract Law, Drafting and Negotiation from LawSikho.
A Memorandum of Understanding (hereinafter the ‘MoU’) is nothing less than the root base to a legal contract. It is an agreement between two or more parties drawn out in a formal written document. The terms and conditions of a contract are not decided by the parties in a single day, proper discerning and contemplation take place before finally formulating a legal contract. This phase from the contemplation of terms and negotiation of terms to signing a legal contract is where an MoU lies. Signing an MoU prior to a contract or treaty is a very common practice in the international law regime and negotiations in high stakes business dealings. (Kenton, 2019)
An MoU bestows the prospective responsibilities of each party in the event of a formal contract, it is a declaration as well an indicator of contract in the upcoming future. It is like a preamble of the final contract. An MoU is made to succinctly specify certain responsibilities and create a sense of understanding in furtherance to eliminating any kind of prior misconception among the parties, Through MoU, parties start their side of communication. Each party formulates its own MoU, which contains information such as:
- What the party intends to offer from their side.
- What is expected from the other parties?
- Certain non-negotiable terms.
Now the party to whom the MoU is delivered proposes counter conditions/offers. This article will discuss what are the necessary clauses which are pertinent to be drafted for an effective and unambiguous MoU.
There are certain points which are pivotal while drafting an MoU. They are:
The motive inclined in the Agreement
Since an MoU is formulated to put-forth your intention and expectation, each party partakes in the practice to present their case, which makes the explicit mentioning of the intention of party imperative. It is the first and foremost thing while drafting an MoU, initial clauses of an MoU generally filled with, what is the party hoping to achieve from this engagement and how they are willing to proceed to achieve that motive. Precisely mentioning the intention has a twofold benefit. First, it gives the idea to the other party that, what is the agenda of the party presenting the MoU and whether, it is their interests to further take it to the stage of a formal indenture and secondly, it makes the statement that the party does not have any ulterior motive. It helps in precluding any kind of surprise or shock to the other party and saves time which could be wasted due to misconception. (SAFECOM & Security, n.d.)
The core reasoning behind the Understanding
The second important which needs to be mentioned in the MoU is the purpose of it, once the parties’ intentions have been drafted, the next step is to define how this MoU will bolster the motive.
Albeit, an MoU is not legally binding or enforceable, but they do encompass ethical/moral sanctity. Therefore, keeping the assumption that parties will act in accordance with signed MoU. The purpose section should be a concise statement discussing the intention of the new or proposed capability that makes the MOU necessary. It explains how the agencies involved will use the new capability and under what circumstances. To what capability does the MOU apply? When answering this question, consider the questions that follow: (SAFECOM & Security, n.d.)
- What is the intended level of command?
- When will it be used?
- How will it be used?
Tenure of the Agreement
Since, an MoU is a temporary non- binding agreement, which gives the indication of an imminent contract. It must specify for how long the parties can negotiate before coming to the final agreement and forming an indenture. The time period specified gives a certain window to each party during which they can contemplate what should be included and what is to be excluded in the final contract, and during this period of MoU parties effectively negotiate upon it and create a clearer perspective.
Furthermore, another time period that is to be mentioned in an MoU is the duration of the prospective/potential contract. Each party must have a clear understanding of the duration of the prospective contract if they are to enter into one. An MoU may mention the period of the contract, the terms of renewal, important lapses of the time period, shared information and other envisaged events by the parties to be fixed in the proposed timeline, for the perusal of the other party. (Shakeup, 2018)
The very nature of an MoU has an essence of trustworthiness. Since an MoU is not legally binding, it is based on the dogma of ethical and moral sanctity. Now, to ensure that there is no futility in pursuing the MoU, each party undertakes that they are being upfront, honest and negotiating in good faith. In the long run, everyone involved has an understanding that they are working towards a common goal. This is certainly the first step towards creating a more formal and binding contract.
Therefore, the reason behind drafting such an undertaking is that, when you agree to something in writing, it has a subliminal effect on a person and creates a deterrence towards breaking such an undertaking. Also, it is prima facie evidence of a person’s good faith. (DIylaw, 2016)
Making a list of Responsibilities
This important section of the MoU describes the duties and responsibilities of each party. This section is the elaboration of how the contract terms will function in practicality and through assigning responsibilities of each party, it provides a clear understanding of the process of the agreement. This includes everyone involved in business negotiations. It might define the roles and responsibilities of each party, and the scope of those responsibilities depending on each person’s expertise. The MoU should detail all party’s due diligence. Also, all contact information should be accurate. It is generally recommended to enumerate the responsibilities of each party separately, this generally includes:
- To make a list of responsibilities that will be the sole responsibility of one party.
- Then, to mention responsibilities that will be shared by both the parties.
- What will be the consequences of the abdication of such responsibilities?
- High stake business deals also put a mechanism to keep a check on the fulfillment of such responsibilities.
- The MoU may also include which party can make final decisions. Is it everyone involved, or can one person represent the group in good faith?
- If at some point the initial agreement isn’t working, and parties are involved in a dispute, the MoU should have a method laid out for resolving conflicts.
- Where financial implications are involved in the overall intent of an MOU, these should be spelled out in detail including which entity will pay for each item and when payment is due and to whom.
It is always better to make such a list of responsibilities as comprehensive as possible and this is where the skill of good drafting comes into play as it helps in making an effective MoU. After all, to have a clear understanding of the responsibilities of each party is one of the main purposes behind signing an MoU. (Shakeup, 2018)
An MoU is all about creating transparency and removing misconceptions or any false preconceived assumptions. Once, the responsibilities and other terms are drafted, there is a need to negate the possibility of misconstruing the terms, which is why it is imperative that an MoU contains few disclaimers, one of the important one which indicates that employees of Organization A are not to be considered employees, borrowed or otherwise, of Organization B and vice versa. It may also be worthwhile to disclaim what the partnership is not intended to do, guarantee, or create. Although, it goes without saying, that the parties signing the MoU do not intend to enter into a legally binding agreement but given the nature and parties of the MoU, for the sake of brevity such clause is inserted in the disclaimer section. (Johnson & M, 1982)
The final part of an MoU must contain a signature section, in which the representatives of each party signs and acknowledges their consent to the proposed MoU, and a copy is given to each party for a personal record.
Therefore, an MoU becomes a medium through which negotiation is channeled. One of the downsides of signing an MoU is its futility in enforcement if the parties renege from their words and promises mentioned in the MoU. An MoU is not a legally binding or enforceable agreement, nevertheless, it does open a possibility of negotiation and eventually, if everything goes right, it leads to the execution of a contract. It is a way of acknowledging the willingness of parties to formulate a contract in the future and a formal manner to open a dialogue for negotiation of terms for a prospective contract.
DIylaw, 2016. DIylaw. [Online]
Available at: https://diylaw.ng/resources/8-things-to-know-when-drafting-a-memorandum-of-understanding-mou/
[Accessed 23 November 2019].
Johnson, M. L. & M, L., 1982. ASPE. [Online]
Available at: https://aspe.hhs.gov/basic-report/guide-memorandum-understanding-negotiation-and-development
[Accessed 23 December 2019].
Kenton, W., 2019. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/m/mou.asp
[Accessed 24 December 2019].
SAFECOM & Security, H., n.d. Safecomprogram. [Online]
Available at: https://transition.fcc.gov/pshs/docs/clearinghouse/DHS-MemorandumOfUnderstanding.pdf
[Accessed 11 December 2019].
Shakeup, 2018. Shakeup. [Online]
Available at: https://www.shakeup.online/resources/articles/9-important-terms-in-a-memorandum-of-understanding
[Accessed 21 December 2019].
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