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What is a Memorandum of Understanding

There are several types of contracts and agreements that are prevalent in the business world. A memorandum of understanding is a simply type of quasi-agreement, or contract, that originates between two or more parties.
Scholasticus K
Last Updated: Jun 3, 2018
In simple words, a memorandum of understanding is a mutually agreed upon terms, conditions or specified objectives and indicates a certain convergence of wills of both the parties. The only problem is that it is not as powerful as a regular contract. This is due to the fact that a memorandum of understanding is simply a mutual understanding which is not backed up by considerations.
"I will make him an offer that he can't refuse", is a very, popular and aptly suitable statement by the Godfather Don Corleone, in the famous book, The Godfather. Throughout the book we see that both Don Corleone Sr. and Michel Corleone, trying to make a memorandum of understanding (MoU) with several other characters and there is one simple thing they ask for a well understood friendship. The memorandum of understanding, that they offer, in several cases is simple, "Don't bring out your guns, or I go to the mattress and don't intrude my territory or I blow your brains out". Well, this is a very brutal example for a Memorandum of Understanding that a law-abiding citizen can only dream about. On the whole, the entire concept goes that two parties make offers to each other on a mutually understood or acceptable basis.
About the Memorandum of Understanding
Several experts, businessmen and lawyers describe a Memorandum of Understanding as a bilateral or a multilateral agreement between two or several parties, which is non-contractual or quasi-contractual in nature. The following are the key characteristics that define a memorandum of understanding.
  • A Mutual Agreement: A memorandum of understanding is a mutual agreement of fact, terms or conditions, etc. The drawback is, being a mutually agreed upon document its legal enforceability becomes quite limited.
  • Quasi-Contract: This kind of document is chiefly a quasi-contract that is, it does not have legal enforceability beyond a certain premise. A quasi-contract is basically an agreement which has the guise of a contract, however, it does not have the features and the complete legal premise of a regular and pure contract.
  • Bilateral or Multilateral: This kind of understanding is always bilateral or multilateral meaning that the parties which are involved in the understanding have an equal and distinct benefit or advantage from the agreed terms and conditions.
  • Avoiding Unhealthy Rivalry: In the business world, one of the key objectives of a memorandum of understanding is to avoid risky and unhealthy competition between two direct competitors, which might drastically affect both the competitors, either financially or by the virtue of public image and market demand for its goods.
  • No Legal Shackles: The memorandum is also a way of avoiding stringent and confining legal shackles. The initiation, modification, acceptance and execution becomes relatively easy and acceptable for either party in such a situation.
In a maximum of cases, the memorandum of understanding is written signed, stamped and notarized. It is rarely implied.
Examples and Usage of Memorandum of Understanding
A memorandum of understanding is not used in businesses but there are several premises where it is used. International affairs, politics, business relations, fields such as performing arts, nongovernmental institutes, etc.
  • A common example of a memorandum of understanding is often floated between two direct competitors in business, to share a certain market. For example: 'A' and 'B' sign a memorandum of understanding to equally share a certain regional market by supplying equal halves as per demand.
  • In the business world again, an institutional investor invests billions of dollars into a company, against a signed memorandum of understanding in accordance of which a representative of the institutional investor is placed permanently on the board of directors and the company pays off at least 3% rate of return on the investment.
  • The Oil For Food Program was a memorandum of understanding between Iraq and the United Nations where Iraq was permitted to sell crude oil against food and survival supplies for its citizens in the wake of the war.
There are almost no legal remedies for the violation of the understanding except for violating it yourself, which is not recommended. The agreement and the memorandum is basically based upon an absolute mutual trust. Several trade and economic liberalization agreements are, in fact, based upon the consensus of a mutual agreement.