Legal Guide

What are the types of MOU?

by Bhavya Choudhary · 3 min read

Types of MOU

Introduction

  • Mutual consent is very crucial to avoid future complications and disputes between the parties. The types of MOU depend on the requirements and needs of the company and its employees. 
  • It provides a middle point or line between the two parties who choose to establish it by a mutual decision. It holds legal importance and acts as the initial agreement between the parties entering into a future contract or agreement.
  • A Memorandum Of Understanding is a non-binding agreement between two or more parties who decide mutually on the terms and conditions which are to be used in the future contract. 
  • It conveys the intentions and motives of the parties to understand the importance of the business which will be commenced in the future. It is also called a “gentleman’s agreement,” which helps establish the nature of their official partnership.
  • There are different types of MOU that are very important for international deals/treaties and high-end businesses.
  • An MOU is an imminent contract that states the understanding between two or more parties. It elaborates various parts and clauses regarding details of the party involved and the business.

How does it work?

  • There is no monetary exchange in an MOU, and it is a document where every understanding and goal is stated. It explains the requirements and responsibilities of the parties involved.
  • It is similar to a letter of intent and is used simultaneously. They both are non-binding but hold a significant legal value.

When is MOU put to use?

It is used when the parties involved are agreeing to a mutual decision or agreement and want to form a written agreement to finalize it. It is not binding and creates the initial base of their business relationship.

The types of MOU

The types of MOU

There are different types of MOU made according to the requirements of the parties. These are as follows:

  • Joint venture MOU: it is the type of MOU which are formed first for the negotiations between the parties. It is made temporarily to pursue a mutual goal, and it establishes the roles and responsibilities of the individuals.

There are two types of MOU under the joint venture type of  MOU:

  • Contractual joint venture MOU.
  • General joint venture MOU.

 Other types of MOU are:

  • Service agreement MOU: It is the type of MOU which is legally binding for the potential clients and the service provider. They mention the terms and conditions, which are then used for early negotiations. It provides a clear detail of the services which are necessary for business.
  • Outsourcing MOU: This type of MOU is formed between a company and its service providers. The company outsources the services provided by them by following the guidelines and conditions mentioned in this type of MOU.
  • Asset purchase MOU: This type of MOU is used between a buyer and seller. The transaction of any asset or property is based on this type of MOU. It elaborates on details of the negotiations reached and the understanding between both the buyer and the seller as they make an ownership transaction.
  • Share purchase MOU: In this type of MOU, the shares which are purchased are secured with an agreement. The individual who purchased the shares can opt for a security agreement called warranties which can bind them even after the sale.

Advantages

Its most crucial advantage is that it allows the parties involved to express their concerns and negotiations, and responsibilities thoroughly. This reduces the chances of future litigations and establishes trust and mutual understanding.

Disadvantages 

The biggest demerit is that the MOU and other types of MOU are not legally binding. They do hold legal importance, but the parties can choose to abort the agreement whenever required as they are not bound legally. Any indifferences and misunderstandings can be avoided by taking appropriate legal advice from a lawyer.

Creating an MOU needs proper planning and execution, so when parties leave it mid-work, it is a waste of time and energy.

What are the essential factors fulfilled for making an MOU?

  • A party or parties must make the offer of forming an MOU, and the other party must accept it.
  • There must be free consent while making a memorandum of understanding, and it should be free from forgery, fraud, coercion, and influence.
  • The parties who are entering into the MOU contract must be above 18 years of age, of a capable mind, and should not be insolvent.
  • Lawful consideration and object are required to form an MOU between the parties who wish to do business together. 

Differences between a letter of intent and an MOU

  • In most cases, MOU and LOI are used simultaneously and have the same content and effect. The letter of intent is an initial or preliminary agreement that is proposed by one party to another to ensure the terms and conditions are mutually met.
  • It is used by a seller and buyer to define the terms and conditions of the purchase before they can eventually finalize the deal. It is reviewed and signed by both parties to avoid future conflicts. LOI is binding in nature and can be enforced legally. The parties can seek legal advice before forming MOU or LOI to safeguard their interests and avoid disputes.
  • The matters can be reviewed by a lawyer, and solutions can be proposed accordingly to solve the necessary queries.
  • MOU cannot be enforced and is non-binding, though some situations and cases may be taken into court for settlement under the law provisions.

Conclusion

An MOU is an agreement that helps the parties enter a non-binding agreement to reach a mutual decision. There are various types of MOU. It can be further used to form the actual contract for commencing business.

Making MOU or LOI can be very crucial for any business-related activity, and it's necessary to ensure that proper components are put to use. Consulting a lawyer may help in understanding the context in a simple way for further enactment.

Bhavya Choudhary

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Bhavya Choudhary

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