6 SEPT 2018

9 Important Terms in a Memorandum of Understanding

A "Gentleman's Agreement", or a handshake between business partners, used to be all that was needed to seal a deal. But a handshake, although considerate, is no longer enough, and now people doing business together need to get it down on paper in order to ensure that their agreement will be upheld.

Sometimes a formal contract isn't necessary, and a non-binding document can be used in place of a handshake. That agreement documenting an arrangement is called a Memorandum of Understanding (MoU).

A memorandum of understanding is an agreement between two or more parties outlining the terms and details of an understanding, including each party's requirements and responsibilities. It is often the first stage in the formation of a formal contract and does not involve the exchange of money.

Below is a list of 9 important terms used in a Memorandum of Understanding to help you get started when doing business in Malaysia.

1. Intent of the Memorandum of Understanding

The overall intent of a Memorandum of Understanding is to make sure that each party doing business together is in agreement of the details and terms of the agreement.

For instance, it might lay out who the parties involved are, the roles of each person, who's in charge of what. It might include terms and limits. And it might include what amount of profit each person will make.

Unlike a contract, it's not legally binding. This is beneficial when starting out because sometimes things change or are unforeseen. Let's break this down a bit further.

2. Parties to the Memorandum of Understanding

This includes everyone involved in business negotiations. It might define the roles and responsibilities of each party, and the scope of those responsibilities depending on each person's expertise.

The MoU should detail all parties due diligence. Also, all contact information should be accurate.

The MoU may also include which party can make final decisions. Is it everyone involved, or can one person represent the group in good faith?

If at some point the initial agreement isn't working, and parties are involved in a dispute, the MoU should have a method laid out for resolving conflicts.

3. Good Faith

As mentioned, good faith is an important concept in a MoU, because it is non-binding. Even though the details are written down, there should be an agreement between all parties that they are being upfront, honest and negotiating in good faith.

In the long run, all involved have an understanding that they are working toward a common goal. This is the first step towards creating a more formal and binding contract.

4. Period/Duration

A Memorandum of Understanding should set realistic goals. With that comes an agreement as to the period or duration of the agreement. This should include both short-term and long-term goals. Dates for performance reviews should be decided, as well as an overall evaluation of the progress of the business arrangement.

There should be specific dates outlining when the agreement begins and if and when it should end. What happens if one or both parties choose to terminate the MoU?

5. Exclusivity

Expanding on the duration is the concept of exclusivity. This means that negotiations include an agreement that they will not continue to seek out a third-party for a better deal.

Many Memorandums of Understanding include an exclusivity clause which binds each party to their agreement. Third parties are "locked out" of negotiations and each person agrees to no longer shop around.

However, often if a third party is unsolicited this can be acceptable. Again, this is non-binding, yet under "good faith" this agreement is understood and an exclusivity clause is often included along with the duration of this exclusivity.

6. Best or Reasonable Endeavours

Within a Memorandum there is an understanding that all parties will work towards the greater good of the business.

There can be a distinction made between best or reasonable endeavours. Often during difficult negotiation, it is understood that only reasonable endeavours can be expected. However, a MoU might define the distinction.

If best endeavours are always expected, that may not be practical and contribute to future disputes.

7. Non-Disclosure

Non-disclosure and confidentiality are important components to a MoU. Although this can fall under the category of good faith, it's still a good idea to include a clause that all parties agree to maintain confidentiality, what information that includes and the duration of non-disclosure.

Too often, information that has been developed between business partners are then revealed to others in order to make a profit. This kind of betrayal can cause irreversible harm to a business.

8. Finances

Although at the point of negotiations when a Memorandum of Understanding is laid out, money is not exchanged, the details of finances should be decided.

The MoU should include a detailed explanation of fee payment arrangements and payment of goods or services. It should include who has the authority to accept payments and make financial decisions, including investments.

9. Disclaimers

Although not necessary, each Memorandum of Understanding is unique, just like each business partnership is unique. It's not unreasonable to include disclaimers particular to the individual agreement.

Also, it might be a good idea to include a disclaimer for legal protection. In essence, a disclaimer might state that the agreement is not nor intended to be legally binding and that no party involved is under any legal obligation.

Finalizing a Memorandum of Understanding

Now that you have information about the key terms of a Memorandum of Understanding, it's time to get started on creating your own.

The most common way to do this is by downloading an online template and then modifying it to the particular needs of your business arrangement.

However, unless you’re a practicing lawyer, altering templates downloaded from the internet is definitely not a good idea, as this exposes you to further legal risks.

That’s why business owners and entrepreneurs use ShakeUp!

ShakeUp!’s easy-to-use, affordable and no frills DIY online legal document service platform allows you to create your own Memorandum of Understanding simply by answering questions presented to you, and the document will be prepared automatically based on your answers.

In fact, you can get your Memorandum of Understanding done up in just 5 simple steps!

For more information on creating a Memorandum of Understanding and other legal documents that might be of value to you when doing business in Malaysia, contact us today or try out ShakeUp! with a free trial.

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