A Memorandum of Understanding (MoU) is a document that outlines the basic terms of a commercial arrangement. While it’s not legally binding, it’s often used as a stepping stone for more detailed documents and legally binding agreements later down the track. In other words, an MOU can be seen as the first draft or blueprint of what you’re both agreeing to, so you can set it in stone later.

While a Memorandum of Understanding isn’t legally binding, you can make it legally binding if you make it clear in the document that both parties intend for the agreement to be legally binding. It should also satisfy the other elements of a legal contract, such as offer and acceptance.

A Memorandum of Understanding can be written depending on your business’ specific needs and what you’re agreeing to. Essentially, it should lay out the key terms of your business relationship moving forward.

For example, if you’re entering into an agreement to work on a project with another business, you can set out an MOU before a proper legally binding agreement just to get an understanding of what each party wants. In this case, the MOU would cover payment, IP rights, duration of the project, required resources, confidentiality and any privacy concerns.

A Memorandum of Understanding is intended to lay out the key terms of your business relationship, or the agreement you’re entering into, without the legally binding element. This means that if something goes wrong, or if a party defaults on the promise, there are no grounds to take legal action. It’s commonly used as a stepping stone for the proper agreements that come up later down the track.