Memorandum of understanding

A memorandum of understanding records what two parties intend to do while they negotiate. Most of it is deliberately not legally binding. It describes the proposed arrangement, the contributions each side expects to make, an indicative timetable and indicative commercial terms, and it commits nobody to any of them.

A handful of clauses do bind, and they are marked as binding in the document. Clauses 9 to 19 cover confidentiality, exclusivity, costs, announcements, and the law and courts that apply while the parties are talking. Those are the provisions that are only worth having if the other side can be held to them.

The mistake this document exists to prevent

Do not start work, take on staff, buy equipment or spend money in reliance on a memorandum of understanding. It does not oblige the other party to do anything, and the fact that both sides plainly meant to proceed will not change that. If you need the other party to be obliged, you need a contract.

What it contains

Parties and background. The status of the memorandum, set out twice, once at the front where nobody can miss it and once in the binding section. The purpose, the proposed arrangement and the intended contributions of each party. An indicative timetable with an owner and a target date against each milestone, running through due diligence, internal approvals and board approval to signature of the definitive agreement by a longstop date. Indicative commercial terms, and a clause on the negotiation of the definitive agreement. Then the binding half: confidentiality, exclusivity, costs, announcements, notices, and governing law and jurisdiction.

Exclusivity, and what it costs you

Clause 11 gives two options, one granting a period of exclusivity and one granting none. Keep one and delete the other, and set the period deliberately. Exclusivity stops you talking to anyone else while it runs, which is a real commercial cost if the negotiation stalls. It is a concession worth giving, but it should buy something.

Cross-border deals

If one party sits outside England and Wales, choose the governing law and the courts at clause 19 with care. A binding confidentiality or exclusivity clause is only as good as the place where you would have to enforce it, and that is a question to settle at the memorandum stage rather than once something has already gone wrong.

The document is marked subject to contract throughout. Take advice before signing where the collaboration is significant, involves personal data, or involves sharing valuable intellectual property.