MOUs and MOAs

I have seen people wondering about, when they reach a situation where they have to ink a document. They get confused what the document could be and what is it called and why it is called so and so many questions alike. Here we would try to decipher the import of MOU and MOA two very usual documents in the business/commercial arenas.

What are MOU’s And MOA’s

MOU stands for Memorandum of Understanding and MOA stands for Memorandum of Agreement.

MOUs and MOAs are both written agreements between two parties. If that be so what is the difference between the two?

There is no established legal difference. Many a times it has been seen the two terms used interchangeably. As in the case of MOA because it contains the word “agreement”, and as per definition in Indian Contract Act 1972 a contract is an ‘agreement’, some people believe that an MOA signifies a more significant commitment than an MOU. So if you are having difficulty with entering a partnership using an “MOA”, then see whether your potential partner wants to sign an “MOU”.

However, if the document whatever way it is named, if does not contain ingredients of an agreement or contract, then it will remain as a mere understanding and can be aptly called MOU rather than MOA.

In MoU, there would not be any default clause or dispute cause. Whatever issue arose upon the document will have to be settled mutually without obligations on either party. Whereas in an agreement usually the obligations will be clear and consequence of default and what liability the parties will have will also be clear. In this view the MOU and MOA can be differentiated and the nature of document can be understood.

To elucidate this a clause from MoU can be quoted here as follows:

“Both the Parties shall carry their own responsibilities and liabilities under this document without any recourse to other Party”

Whereas in an agreement it will be provided as follows:

In case of violation of any of the terms of this agreement by a party, the other party will have a right to terminate this agreement and shall be entitled for penalty as provided herein; notwithstanding his rights to sue him for the loss suffered by such party.

So the differences here are mainly threefold:

1 there is no strict liability to fulfil obligations under MoU but MOA obligations are binding
2 the party not fulfilling his obligations would be still caught free without any consequences under an MOU, but the violation of an agreement will entail penalisation.
3 MoU is not treated as a contract but only as an informal agreement to enter into a contract

Why Use MOA's and MOU's?

If you are signing a contract with someone, whatever it is called, whether MOU or MOA, make sure that the contract has been legally reviewed and that you understand what your obligation is.

An MOU is like an agreement, but it doesn’t have to carry the same legal weight. That is because this kind of an agreement doesn’t need to be intended as a legally enforceable arrangement, but a “Contract- MOA” always is intended that way. However, an MOU can include any or all of a contract’s terms and conditions. If it includes all of them, but is just titled an MOU, it can carry as much legal weight as a contract. Most often, an MOU is just a statement of cooperation or understanding about a specific or general topic between two (or more) parties. It is often used to clarify the roles and responsibilities of each party in a shared situation of interest. For example, when both the A company and B Company want to undertake a critical study on project as assigned by the Authority, they can write an MOU stating that they will cooperate together in making that happen. If none (or just some) of the standard “terms and conditions” are included, an MOU can be an attractive option to a standard contract or MOA, because it will be simpler to use. And it can avoid the potential insult, resentment, or distrust that can result from asking someone to sign a fully-provisioned contract, rather than accepting that they honour their word. Usually, the point to MOU is building a cooperative effort. So an MOU is useful when both (or multiple) parties have developed, or would like to establish, a partnership based on a level of trust, rather than just legal obligation.

Even in a work situation, if the parties have an established working relationship and trust each other, an MOU can be used in lieu of a standard work contract, and serves simply to clarify the work plan or scope of work. MOUs are good ways to start off a formal, recognized partnership with someone. They can contain as little or as much obligation as both parties are willing to sign, and be as specific or general as needed. In the end, even a general and short MOU can be the start of working towards a more meaningful relationship or goal. As a community, the more MOU you can show funding agencies and other potential partners, the better. MOU and demonstrated partnerships will help to bring you the services or funds that you lack for the work you want to do.

However, regardless of how an MOU is used, without the standard contract terms and conditions, MOU doesn’t offer the same legal assurances or protections. If there is a substantial obligation that is being committed to that involves a significant amount of funds or services and if there is distrust or different goal motivations between the signers, then you should consider a standard contract or MOA with the full range of standard contract terms and conditions-- or at least as many that make sense for your situation.

Guidelines for signing documents

Before entering into any of the above documents, the following points may be considered:

Purpose of the document
Does the document link to the plans and objectives
What are the benefits of the document ie what will be delivered to youl
Does the document comply with all of the legal formalities which may be required
What are the commitments/liabilities/resources
What are the main risks associated with the document and can they be insured
Is legal opinion required
Whether the other party has the authority or entitlement to sign the document
What would be the consequences of not signing the document
What other potential partners may get precluded by virtue of this association
How does the relationship enhance and sustain among the parties
What is the scope of the default clause and confidentiality clause in the document

For assessment of the risk associated with the document, consider;

Is the document necessary in order to receive the benefits
What commitments will this document require and over what time period
What due diligence checks have been carried out on the other party or parties to the document
What would the consequences of not signing the document
Is there adequate insurance cover - if not, or not clear, refer to advice
Are there commercial implications of the document
Undertake a risk assessment
Is the initiative high/extreme risk and related
Does the document require the granting of an indemnity or guarantee
Are there any legal issues which require clarification
Are there any financial implications which require consideration
Are there any intellectual property implications