Introduction
A Memorandum of Understanding or MOU is a commonly used document but at times confused with a contract or Memorandum of Agreement (“MOA”). In this article contract I explain what an MOU is and its contents.
Memorandum of Understanding
This is an agreement between two or more parties that captures the parties’ willingness to co-operate together in some way for purposes of possibly moving forward to a contract. The key word is “understanding”. In simple terms this means the understanding that the parties have towards each other that may eventually lead to a contract or memorandum of agreement.
Put differently, an MOU signals an intention by the parties to do something that may lead to an agreement or contract if the parties are satisfied with each other after carrying out certain work or procedures after the signing of MOU.
Some people view an MOU as a loose arrangement that is not necessarily binding on the parties on the basis that it lacks the force or effect of a contract or MOA. There are no rights or obligations that are associated with a contract. For example at the MOU stage there is no deal or business arrangement yet. Parties will be exploring if it possible to do business together. MOUs are frequently used by parties in business or by Governments in international relations.
Examples of situations where MOUs may be used
A foreign investor might be looking for investment opportunities in Zimbabwe and therefore wishes to have further engagements including possible negotiations with some businesses in the country. To show serious intentions the foreign investor and local business partner may agree to capture their intentions to explore possible ways of working together in business for mutual benefit. It is common for such MOUs to be accompanied by or incorporate Non – Disclosure Agreements (“NDAs”) or Non- Circumvention Agreements (“NCA”).
After the signing of an MOU parties can have further discussions and may exchange important information. At this stage there is no deal. Parties are simply exploring opportunities or possibilities.
The foreign investor may even request to carry out a due diligence on the local business partner. The local business partner may also carry out a due diligence on the foreign investor.
When the parties are in agreement that they can work together in some business arrangement or deals they may then enter into some contract or agreement such as:
- Joint venture agreement
- Shareholding agreement
- Distributorship agreement
- Agency agreement
- Supply contracts
- Loan agreement
At international relations level Governments may also enter into some MOU seeking to cooperate in some way for example in economics, technology transfer, health, energy or some other arrangements.
After further engagements or exploring of options the Governments or Government and international organisations may then zero in on some areas that they agree to work on together. They may then enter into specific agreements or contracts.
Contents of Memorandum of Understanding
The following are items usually included in an MOU:
Parties
There are the people or organisations signing the MOU who or which intent to explore ways of working together through possible contracts.
Definition of project or areas of understanding
This party is key. It defines the nature, scope and details of the project or areas which parties wish to explore for possible contractual arrangements. In a business situation an investor may, for example, explore possibilities of trade, mining joint ventures, shareholding, distribution of products, agency, etc.
Roles and responsibilities of the parties
In an MOU parties have to define each other’s roles and responsibilities during the tenure or currency of the MOU. This may include exchange of important information, allowing or carrying out a due diligence on each other, joint meetings with key stakeholders, etc.
Tenure
It is advisable to have the tenure of an MOU defined so that it is not opened ended.
Whether exclusive or not
Some MOUs state whether there is exclusivity or not during the tenure of the MOU.
Legal status of MOU
Unlike a contract or MOA an MOU is considered a document capturing mutual understanding of future intentions of the parties. The intentions may or may not materialise into some business arrangements for which a contract or MOA may be signed. It is often considered as non-binding and lacking legal force. Many MOUs die natural deaths as they may be abandoned or expire without anything meaningful being achieved out of them.
Common confusion
MOus are usually confused with actual contracts such as the business arrangements explained above. For example if an MOU is for purposes of exploring a joint venture a lay person might be tempted to think he or she already has a joint venture agreement. Some people have been disappointed with reality when I interpret MOUs for them and tell them there is no deal yet but just mutual intentions to explore possible deals.
Conclusion
MOUs are widely used in business and international relations. At this point there are no contracts yet as the possibility of contracts is being explored. If agreed upon contracts are then negotiated and signed by the parties. It therefore important to understand MOUs and make sure they are drawn up properly.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is a practising commercial lawyer and conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer. He is also a director with Investacare International (Private) Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
