A memorandum of agreement is a legal document that is a precursor to a formal contract. It’s also called a memorandum of understanding or cooperative agreement in some jurisdictions, and it summarizes the intent of the parties to perform or not perform specified acts and the scope of the relationship. The memorandum is evidence of the meeting of the minds of at least two parties on the subject matter of the agreement, and it often summarizes the essential terms. It’s signed by the parties the same way a finalized contract is signed, and it may or may not be enforceable according to the regional contract law. It’s also used in alternative dispute resolutions as the agreement between the parties to settle a matter, or it may list options for legal recourse if the parties cannot resolve the dispute.
Some negotiations may not advance without a memorandum of agreement. The purpose of the agreement is to give both parties a framework to work within as they finalize a formal contract. It often gives both sides to a commercial, employment, or business deal confidence that both sides will work out a contract to which they mutually agree. For example, two business owners who want to enter into a joint venture agreement may prefer to define the scope of their relationship in a memorandum of agreement first. Doing so may help both business owners feel more confident about drafting a formal joint venture agreement, as the major terms have already been agreed to.
The agreement is written like a short memo, summarizing key essential points that are often in bullet style. The opening is often a brief paragraph or opening statement that includes the words “understood and agreed to” or similar language to indicate that both parties signing the memorandum of agreement understand the terms and agree to them. Following the opening statement is a list of points that summarize the intent of the parties and define the scope of the relationship. It can include specific actions that both parties promise to take or actions that one or both agree to avoid. Payment terms, the terms of the contract, and other contractual provisions are also often summarized and included in the memorandum.
Whether a memorandum of agreement is binding on the parties often depends on the intent of the parties and whether it includes consideration. According to contract law in most jurisdictions, a contract must have consideration to be binding and enforceable. An agreement memorandum is often not an exception to the consideration rule.