You know the basics about a memorandum of understanding.
It’s used prior to creating a construction contract, and creates an atmosphere of “good faith,” paving the way for the future working relationship.
But have you ever wondered what other industries use an MOU and if it is legally binding?
We’re going to look at what an MOU is, whether it’s legally binding, how to use one in construction, and what needs to be included in the agreement.
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What Is MOU in Construction?
An MOU between two construction companies is a preliminary document used to note the approach of the granting of a contract to a party.
An MOU is typically drawn up between a general contractor and subcontractor or a project owner.
An MOU between two construction companies is frequently used to begin the relationship and set the tone between contractors before the issuing of a formal contract.
Often, if the parties are on a tight timeline, a memorandum of understanding may be used as a type of placeholder agreement. In this case, the MOU will be a one or two-page document that outlines the general terms of the agreement, allowing the parties to determine the specific details at a later date.
Other Names for Memorandum of Understanding
You may see a memorandum of understanding referred to by a variety of different names, including:
- MOU Agreement
- Memorandum of understanding form; and
How Does an MOU Between Two Construction Companies Work?
An MOU between two construction companies typically looks like this:
- The first step in creating an MOU between two construction companies is to begin negotiating the terms of the agreement.
This is done by having each party draft their own version of the memorandum, which should include the following details:
- Their ideal expectations
- Their desired outcome
- Any areas in which they are unable to compromise
- Ways in which they believe the other stakeholders will benefit from the memorandum of understanding
The parties should include any preferences they would like to have included in the agreement, as well as any items they consider to be non-negotiable.
Subcontractors will frequently include their terms on the proposals they draft, and that language may then be used as the basis for the agreement.
- Once each party has had the opportunity to review each other’s MOU draft, they will begin negotiations on any areas they disagree upon. It is vital everyone involved has a clear understanding of the major stances each party holds.
- As soon as both parties agree to the terms of the agreement, a collective memorandum of understanding is drafted and signed by all parties.
- Upon signing, the parties may then move to formal contract negotiations as the need arises.
In the meantime, the contractor or subcontractor may start the process of preparing for the construction project. A subcontractor will frequently wait on an MOU before beginning to obtain the materials needed for the project, particularly if the materials require a long lead time.
However, since a memorandum of understanding is not a binding contract, it is not necessarily the go-ahead to order materials.
When Should You Use a Memorandum of Understanding Between Two Construction Companies?
An MOU between two construction companies is used to demonstrate each party’s intent and willingness to engage in the necessary actions to move a contract forward.
A memorandum of understanding is often used in situations where the parties either cannot or do not wish to create a legally enforceable agreement.
Here are a few common situations where a memorandum of understanding might be used:
- You are a business owner who plans to partner with another business
- You own a small business and regularly partner with others
- Another business has expressed an interest in working with your business
- You are interested in collaborating on a specific project with another company
Is a Memorandum of Understanding Legally Binding?
It can be, but not necessarily.
Unless an MOU between two construction companies includes specific language stating that it is an official, legally binding document, a memorandum of understanding is not a legal contract.
Instead, it focuses on the most critical terms and conditions of an agreement and will not include the broad scope of terms that a contract does.
In construction, a memorandum of understanding indicates that a contract is at hand, without legally binding either party to the agreement. If at any time following the signing of an MOU, either party decides not to enter into a contract, there would be no legal recourse for the other party.
It is important to note, however, that a memorandum of understanding is not non-binding by default.
There are some situations where an MOU may be enforced as a contract, by including a legally binding clause. If agreed upon by both parties, a memorandum of understanding may include specific language stating it is legally binding. Under this circumstance, if one of the parties decided to walk away from the agreement, they could potentially be held legally liable.
A memorandum of understanding that is legally binding would contain the following key elements:
- An offer
- The acceptance of the offer
- Legally binding intent
- Consideration, which includes the benefits each party expects to get from the contract, such as payment
How Do You Write a Good Memorandum of Understanding?
A memorandum of understanding should include the following information:
- Contact information
- Signature, position, and date
The specifics of the required information are as follows:
- Background includes why the partnership is needed
- Purpose explains:
- The goals of the partnership
- Details on how those goals will be accomplished; and
- Who will be responsible for completing each aspect of each goal
- Reporting outlines who will be responsible for evaluating the adherence to and effectiveness of the agreement, as well as at what point evaluation will take place.
- Funding should clearly specify that the memorandum of understanding is not a commitment of funds.
- Duration notes that the memorandum of understanding is an at-will agreement that may be modified by the mutual consent of the partners. It includes that the MOU will become effective upon the signature of the partners, and will remain in effect until modified or terminated by any of the partners by mutual consent. An end date will also be included in the instance of the absence of mutual agreement by the partners.
- Contact information includes the following from each partner:
- Partner name
- Partner representative
- Phone number
- Fax number
The Pros and Cons of Using a Memorandum of Understanding in Construction
As with any type of document, an MOU between two construction companies comes with pros and cons for the parties involved in the agreement.
On the positive side, the benefits of a memorandum of understanding include:
- The outlining of clear objectives: An MOU gives each party involved in the agreement the opportunity to clearly declare their intentions by stating their objectives and goals.
- A reduced level of uncertainty: A memorandum of understanding makes the objectives and expectations of each party clear, so the agreement can help prevent any potential future disputes that may occur.
- A foundation for the future: An MOU outlines objectives, laying a foundation for a binding contract down the road.
- Ease of exit: If either party involved in the agreement decides their goals and objectives are not being met, they may easily end the agreement, since a memorandum of understanding is not legally binding.
- Leaving a paper trail: Once finalized, a memorandum of understanding establishes a clear record of the terms included in the agreement.
The main disadvantage of an MOU is that it is not a legally binding document.
As a result, a memorandum of understanding, by design, makes it easy for either party to exit the agreement or not meet the outlined requirement, since these actions don't generally have consequences.
MOU vs. Contract: Understanding the Difference
It is important to remember that a memorandum of understanding is not a construction contract.
- Is a legally enforceable agreement between two or more parties
- Creates an obligation to do, or not do, a particular thing
- Involves the exchange of a promise
- Has a list of terms
- Includes terms are enforceable in court if one of the parties is found to be in breach of the contract
A memorandum of understanding, on the other hand:
- Is not typically legally enforceable
- Is less formal than a contract
- Is often the first step in the contract process
- Is used to get a construction project off the ground if contract negotiations are expected to take a while
- Defines the responsibilities and expectations of each party
- Allows the parties to come to an agreement before the official contract
Why Use an MOU Instead of a Contract?
When considering a memorandum of understanding, construction companies will frequently choose to use one rather than a contract because it is a friendlier bilateral declaration of a working relationship than a formal contract would be.
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