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What is a Memorandum of Understanding?

A Memorandum of Understanding between companies is a document like a contract but not binding on the parties, except when confidentiality and non-competition agreements are included. It is essentially a collection of key points of an agreement between two parties that are negotiating a contract; in this respect, a Memorandum of Understanding is simply the agreement signed prior to the final contract. Memorandums of Understanding are also known for its acronym MOU.


Main purposes of a Memorandum of Understanding

Thus, among the purposes of Memorandum of Understanding we can include:

  • The statement that the parties are currently negotiating.
  • Clarifying the key points of an operation for the convenience of the parties.
  • Assess the interest of the other party to carry out the business.
  • Collect the advances that occur in each of the negotiations.
  • Provides guarantees if the deal collapses during negotiation.

The type of Memorandum more used in international negotiations is those related to Distribution and Joint Venture Contracts. You can find models of these Memorandums en the following links:


Bidding on parties

In certain complex transactions, the parties may wish to come to a preliminary agreement, sometimes called an “agreement to agree”, which may or not be enforceable, depending on the circumstances and applicable law. Such an agreement may take the form of “Memorandum of Understanding” -also called Letter of Intent or Commitment Letter-. The preliminary agreement may be necessary when a certain major issue (such as obtaining a government authorization) is not yet definitive.

Another function of the Memorandum of Understanding is that the parties will use the preliminary agreement to resolve certain basic issues while continuing to negotiate on more complicated matters.


Differences between Memorandum of Understanding and Letter of Intent

The Memorandum of Understanding is similar to the Letter of Intent, although has three main differences:

  • Use a more formal language similar to the preceding contract, i.e are a summary of the agreement signed before the final agreement.
  • May involve more than two parties while Letters of Intent refers only to two parties.
  • Must be signed by all parties, while the Letter of Intent is signed only by the party that proposes the agreement.


Memorandum for negotiations in China

It is very common to use Memorandum of Understanding in negotiations with Chinese companies. Because these negotiations are very long and complex and, on the other hand, Chinese negotiators often use the technique of continuously modify the terms agreed, at the end of each meeting a Memorandum of Understanding should be drafted setting out the progress and the points on which agreement has been reached. The Memorandum should be signed by both parties and include a confidentiality clause.

Another characteristic of the Memorandum of Understanding is that can resemble a written contract but usually not binding on the parties in their entirety. However, the majority of these agreements, contain provisions that are binding, such as non-disclosure and non-compete agreements.

imgContratosInternacionalesInglesTo obtain models of International Contracts and Memorandum of Understanding in different languages click here.

About Olegario Llamazares

Economista, director de Global Marketing Strategies y socio fundador del portal Globalnegotiator. Está especializado en negocios internacionales con un énfasis en comercio exterior, marketing y negociación internacional. Tiene su residencia en Madrid, España.Economist, managing director of Global Marketing Strategies and founding partner of the website Global Negotiator. He specializes in international business with an emphasis on trade, marketing and negotiation.