When you’re working with a new business partner (or multiple), getting clarity for the collaboration is vital. A helpful tool in these scenarios is a Memorandum of Understanding (MOU).

In this article, we’ll cover the ins and outs of MOUs, including what they are, how they’re structured, whether they are legally binding, and other frequently asked questions.

Plus, we’ll show you how PandaDoc can be your best friend when it comes to expediting your document generation process.

Ready to dive in? Let’s go.

What is a Memorandum of Understanding (MOU)?

Simply put, a Memorandum of Understanding is a written agreement that outlines the intended collaboration or mutual understanding between two or more parties.

MOUs are not usually legally binding (more on this later), but they aim to establish a groundwork for a formal partnership by detailing goals, responsibilities, expectations, etc.

Here are some common uses for MOUs in business:

  • Defining the scope of collaboration between two parties (i.e. two companies)
  • Clarifying each party’s role and responsibility before entering a formal contract
  • Detailing a verbal agreement in writing
  • Setting a foundation for legal agreements in the future

Essentially, if you’re looking for a way to align on objectives during the beginning stages of a partnership without committing to a binding contract, MOUs are the way to go.

Top benefits of using an MOU

Using an MOU is valuable for multiple reasons; it clarifies each party’s responsibilities and expectations from the outset.

MOUs also help prevent miscommunications or disputes later in the partnership, since everything is defined clearly. Plus, these agreements offer flexibility that many contracts don’t, leaving room for negotiation and adjustments as the partnership grows.

Using a memorandum of understanding (MOU) is preferable to a verbal agreement; it provides a written record without the need for legal enforceability.

Common use cases for MOUs

Different industries utilize MOUs in different contexts.

An obvious use case for an MOU is in business partnerships where both parties need to define terms for collaboration; between two companies, for example.

MOUs can also be relevant for outlining community programs or funding initiatives between nonprofits and government agencies, or formalizing research/exchange agreements at academic institutions. Startups can use MOUs to align with investors, advisors, or early partners before setting up a contract.

Is an MOU legally binding?

In most cases, MOUs are not legally binding. However, they can become enforceable if the language included expresses intent for legal obligations.

It’s possible a court would enforce an MOU if:

  • Its terms are clear and specific
  • Both parties agree to be bound to legal implications
  • The agreement is structured and contains the content of a formal contract

Regardless, it’s a good idea to explicitly state whether the MOU is to be legally binding within the document itself—or opt for a more traditional contract.

Keep in mind that, while MOUs are usually not legally binding, creating one typically signals the fact that a binding contract is imminent, as it is still a (more) formal agreement with intent for collaboration.

For further reading, check out the differences between a contract and an agreement.

What’s the difference between an MOA and MOU?

Both a Memorandum of Understanding and a Memorandum of Agreement (MOA) are documents that outline collaborative agreements. However, there are several key differences that make them distinct:

MOU

  • Expresses a mutual understanding and intention between two or more parties
  • Usually non-binding, unless otherwise stated in the doc
  • Best for early-stage discussions in a less formal way
  • Often used for planning prior to a formal agreement so all parties can align (see next section on contracts)

MOA

  • Outlines specific, concrete responsibilities and obligations that are agreed-upon by all parties involved
  • Often legally binding and enforceable
  • A more formal document, typically used to finalize and implement an agreement
  • Can be used to enforce the agreed-upon terms outlined in the document

Simply put, MOUs are best for preparing for a collaboration, while MOAs are used to make the collaboration official.

How does a Memorandum of Understanding differ from a contract?

Contracts take the “official” state of a doc even further by making it enforceable. A contract is a legally binding agreement with enforceable terms, while an MOU is not usually enforceable unless it meets certain legal criteria.

Let’s break that down even more:

MOU

  • Outlines the intention to collaborate and a mutual understanding between two or more parties
  • It’s not typically legally binding, except under specific circumstances
  • Informal in nature, as it has flexible terms and obligations
  • Often used to lay the groundwork for partnerships before committing to a contract

Contract

  • Establishes obligations between all parties that are legally enforceable
  • These are binding and can be upheld by law in court
  • It has a formal tone with detailed terms, conditions, and repercussions for non-compliance
  • Often used to finalize commitments discussed in earlier stages of a partnership and provide legal protections

Starting with an MOU is a great low-risk first step if you’re still figuring out what type of document would meet your needs.

If you’re ready to take the plunge with a contract, PandaDoc offers contract management software that will save you time on your deals while maintaining accuracy.

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What should a Memorandum of Understanding include?

Now that you know all about what an MOU is, let’s talk about what it should look like.

A solid MOU should set a framework for the collaboration. Here are the components you should include:

  • Title: The document needs to be clearly identified as an MOU to avoid any ambiguity about its purpose.
  • Dates and timelines: Make sure you state the date the MOU goes into effect and any other relevant dates, like duration, expiration, renewal, etc. You should also describe key milestones and deadlines for the project.
  • Parties involved: Full legal names of all parties (whether the organization or individual) who will be involved in the agreement. It’s also a good idea to include relevant contact information.
  • Purpose: This is where you explain the intent of the agreement—why are these parties collaborating and what are they hoping to accomplish?
  • Scope of work: Be specific when detailing what activities, projects, or initiatives that the MOU covers—this will help avoid misunderstandings later.
  • Responsibilities: Clearly describe what each party is expected to do within the collaboration. This is where you can detail roles, deliverables, and who is responsible for what in the MOU.
  • Confidentiality clauses (if applicable): Make sure you outline terms for protecting confidentiality and/or intellectual property if any sensitive information is to be shared during the collaboration.
  • Signatures: There should be a designated space for all parties to sign the document alongside their printed names, titles, and dates. This is vital, as it demonstrates the acknowledgement/agreement to the terms outlined in the MOU.

How to create an MOU

Now that you know what it should include, you might wonder how you go about creating an MOU. Here are a few simple steps you can take:

  1. Start by defining what the purpose of the document is and what it’s meant to achieve.
  2. Identify who is involved with the collaboration, and therefore the MOU.
  3. Draft the terms with all the parties involved so you know your goals, responsibilities, timelines, etc. as outlined in the above section. This is where a solid document generation software comes in handy, as it can same valuable time when creating business documents.
  4. Consult a legal counsel if you have any concerns about legal enforceability of the document.
  5. Finalize the MOU in a professional format that includes all the necessary clauses. Check out our extensive contract template library here!
  6. Have all parties sign the agreement to show their commitment to the terms.
  7. Distribute and store copies of the document that can be stored digitally for easy access.

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Just ask our client, Wizehire, who reduced their contract creation time from one hour to just five minutes!

They were able to send 25% more documents each month while reducing document generation time by 95%, allowing them to spend more time helping businesses and less time on manual processes.

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Best practices and mistakes to avoid

Here are some best practices and mistakes to avoid when creating an MOU:

  • Use plain language to avoid confusion and maintain clarity. It’s vital that you aren’t vague or ambiguous in the document.
  • Make sure to clearly state whether or not the MOU is legally binding.
  • Include all stakeholders in the drafting process so nothing gets missed, including key responsibilities of parties.
  • Detail all outcomes and timelines that can be measured and/or referenced throughout the collaboration. This means including expiration, review, and renewal dates.
  • Don’t forget the legal review for complex agreements—it’s always safer to get legal counsel when you’re unsure of the document’s enforceability.

For more helpful insight on document management best practices, check out our article on 18+ ways to manage your documents like a boss.

Step up your MOUs with PandaDoc

Whether you’re exploring new partnerships or taking the first step toward finalizing shared goals, an MOU is a great way to add structure and clarity without the pressure of legal obligation.

Ready to see how PandaDoc can work for you? Request a free demo today.