What is a Memorandum of Understanding (MOU)

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A Memorandum of Understanding (MOU), otherwise known as a Letter of Intent, is generally used to record the mutual understanding and intention of two parties. It is often used prior to entering into a formal agreement in order to facilitate…

by | Nov 18, 2021 | 2 comments

A Memorandum of Understanding (MOU), otherwise known as a Letter of Intent, is generally used to record the mutual understanding and intention of two parties. It is often used prior to entering into a formal agreement in order to facilitate the early stages of discussion. An MOU is not intended to be the final agreement between both parties, nor contain the full details of a transaction in its entirety, but it will often set out certain key provisions as well as how both parties will continue to proceed in good faith.

Which key points should be considered when entering into an MOU?

Save for certain core operative provisions such as those relating to agency and confidentiality, it is important to note that an MOU is not intended to be legally binding.

Even though an MOU is not the final agreement between two parties, the following should be given careful consideration : 

  • Financial and payment terms: there may be payment obligations upon one party that need to be completed upon the signing of the MOU, and which are to be undertaken prior to the entering into of the final agreement;
  • Delivery terms: as above, delivery of an item or performance of a specified task may need to be undertaken upon the signing of the MOU;
  • Risk: if either of the above is not completed, how is risk allocated and to whom;
  • Agency: it is imperative that neither party is authorizing the other to act as its agent or representative;
  • Confidentiality: where collaboration is in its early stages, it is likely either or both parties will want matters kept confidential; 
  • Governing laws: it is important to specify that the MOU will be subject to the laws of a particular chosen Emirate and its courts;
  • Terms yet to be agreed: as an MOU is widely considered a precursor to the main agreement there may be terms already considered highly relevant and in need of being documented at the outset.

It is crucial that the parties decide at this stage which terms they wish to be legally binding upon the other, and which are not intended to be.

Article 258 (1) of the UAE Civil Code states: “The criterion in (the construction of) contracts is intentions and meanings and not words and form.” Thus, if an MOU meets the elements of a contract it may still be binding upon the parties, even if the parties do not call it a contract or intend to be bound.

Moreover, if a contract is deemed to have been being entered into, the contract must be performed in accordance with its contents. Therefore it is imperative to ensure the MOU states that, save for those matters expressly agreed to be legally binding, the remaining terms are non-binding. This is so that the parties avoid being unintentionally bound to terms that were intended to be up for further discussion or negotiation. 

Benefits of an MOU

There are various advantages to using an MOU prior to entering into a formal contract or agreement:

  • They make sure both parties are on the same page in order to progress forming a deal, especially where the transaction or deal is complex;
  • Each party is able to set Key Performance Indicators (KPIs) for the other;
  • They help to align the values of the parties and set out expectations during the initial negotiations thus avoiding conflict later down the line;
  • They help formulate an open and honest business relationship which in turn will promote a mutually beneficial outcome without binding either party to legal obligations;
  • If negotiations do break down, the parties are able to walk away without any legal exposure or the need for a formal termination. 

Conclusion

MOUs are useful in bringing together two parties and ensuring they continue to proceed amicably and in good faith. They help in setting out a framework within which parties will collaborate in order to conclude the final agreement. However, care must be given when drafting an MOU, to ensure the parties are not unintentionally bound by certain terms contained therein. For this very reason, it is important that proper legal advice is sought prior to signing any MOU.

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2 Comments

  1. Kiran

    An excellent article, very clear and concise to understand. Not only will it be relevant to UAE but globally.

    Reply
    • bizzmosisSEO

      Dear Kiran,

      thank you very much for your sharing your warm words about the blog post.

      Look forward to being of help!

      Reply

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