Memorandum of Understanding (MoU)

A Memorandum of Understanding, or MoU, is a declaration of intent between two parties regarding a planned cooperation or transaction. It records shared objectives and key terms, but is usually legally non-binding. It serves as a roadmap before binding contracts are drafted. In practice the terms memorandum of understanding, letter of intent and term sheet are used largely interchangeably. Where a distinction is drawn, a memorandum of understanding tends to emphasise a joint position of several parties, for example in a joint venture or cooperation, while a letter of intent tends to come one-sidedly from the prospective buyer.

Legally what matters is not the heading but the content: where specific obligations are agreed in the required form, a binding effect can arise despite a contrary label, which is why an express statement of non-binding character and clear marking of the exceptionally binding parts such as confidentiality, exclusivity, cost allocation and choice of law are indispensable. It should also be noted that even non-binding negotiations create pre-contractual duties, so breaking off without reason after the other side has incurred substantial costs can give rise to claims. The document's practical value lies in surfacing misunderstandings early and documenting the state of negotiations for the boards involved before significant costs for diligence and drafting arise.

It is advisable to gather the binding parts in a separate section and label them expressly as such, because mixing them leads in a dispute to an interpretation neither side intended. The document's own term also needs settling, since a letter of intent without an end date binds the seller longer than intended. For multi-party projects such as a joint venture, a provision on how preparation costs are handled if the project fails is also advisable.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.