The memorandum of understanding (MOU) is a popular document in the world of business. Despite that, however, it is a document that is commonly misunderstood, especially amongst Middle East practitioners. This article aims to shed some light on this often-used document and discuss its popular functions.
By definition, the MOU is a document in which parties set forth their understanding with regards to a future business endeavor, and based on which each party will individually undertake to do some work. It generally is not a legally binding document (such as a contract), but rather a mere guiding document for the development of future binding documents. Its development, however, is important to allow each party to undertake some preparatory work prior to entering into binding agreements. Absent express language to the contrary, courts and arbitration tribunals will not enforce or push the parties to an MOU to adhere to its terms and provisions.
As business parties use MOUs to set forth their understanding and expectations regarding a contemplated project or venture, they can develop a brief or a detailed MOU. A brief MOU will establish the major themes pursuant to which the parties wish to enter into business. Best practices, however, are clearly in favor of the detailed MOU as it gives the parties a chance to negotiate and settle their understanding regarding many of the details of the future endeavor at an early stage.
To give an example to this, we simplistically look at the following situation: say a bakery and a restaurant are considering partnering in the provision of catering services. The parties can enter into an MOU that briefly sets forth the broad terms of the engagement: who will be responsible for which goods or services, how the administration of the services will be handled, and how the revenues, profits, or payouts will be administered. The MOU here would allow the parties to start their project feasibility research, look into sourcing the necessary inputs, and budget for the future expenditures.
Alternatively, the parties can fully negotiate and set out the details of their expected engagement in the MOU, including items such as legal form, management of the new service, responsibility for staffing, various production and services responsibilities, financial matters, the liability profile of each party with regards to rendered products and services, and so on. It is important to understand that all business details will inevitably be negotiated, if not at the MOU stage, then at one of the contract stages or through dispute resolution processes. The advantage of a full MOU is that it allows the parties to (i) have a better understanding of the contemplated arrangements for the purposes of their preparatory work, and (ii) achieve a more certain level of negotiation prior to sinking the cost of the preparatory work.