A memorandum of understanding (MoU) can be thought of as a more formal version of a gentleman’s agreement. It outlines matters such as how a deal will take place, the obligations placed on the parties to the agreement and the intended remuneration. It is a way of clearly documenting negotiations and establishing terms without creating a formal contract.
An MoU may be legally binding. If the parties’ intentions are clear, sufficiently detailed and the document does not state that no contract is intended, a court may hold it to be binding. An MoU should be carefully drafted, containing outlines of the intended deal and should make clear that it is not intended to be legally binding.
An MoU is a valuable tool for setting out a roadmap and timetable for a future deal. It can clearly outline each party’s position and allow for limited actions to commence, such as instruction of professional advisors. It also serves as a record of where the parties are in the negotiating process and what agreements have been reached.
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