Memorandum of Understanding

What does Memorandum of Understanding mean?

The Definition

A memorandum of understanding is an agreement between two or more parties, where all parties agree to be on the same page. This type of understanding is just a step above a gentleman's agreement. It is not necesarilly a legally binding formal agreement, but it is more formal than someone's word, promise, or agreement. This type of understanding is a convergence of wills, where everyone confirms that they agree to a common line of action.

Details on a Memorandum of Understanding

Normally, a memorandum of understanding is drawn up in contract type form and signed by all parties. This type of contract, however, is not a legal contract, mainly because those who agree to a memorandum of understanding do not imply a legal commitment, or they don't have any grounds for creating a legally enforceable agreement under these circumstances.

However, whether the contract constitutes as a legally binding contract or not will determine if the contract is worded in a certain way. There must be a presence of well-defined legal terms and phrases within the contract to make it apparent that the contract is indeed legally binding. The required elements that need to be present in the understanding for legal binding are:

  • Offer
  • Acceptance
  • Consideration
  • Intention to be Legally Bound

These elements are also called the "four corners" of an understanding, which identifies it as legally binding or not legally binding. Also, all parties must be present at the same time to sign this memorandum of understanding, as well. In the United States, however, these type of contracts can be different in their specifics requirements, mainly depending on what the contract is about. This includes understandings concerning goods, which would fall under the Uniform Commercial Code, or understandings concerning services, which would fall under the common law of the state.

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