Memorandum of Understanding – 4 reasons you need one

Huynh NguyenJuly 13, 2022

Memorandum of Understanding – 4 reasons you need one

What is Memorandum of Understanding?

Are you negotiating terms with another party about your business and their partnership in it? Does someone else have the power of attorney in UAE for your business while you wish to negotiate on few terms? A Memorandum of Understanding is a tool that helps businesses in establishing relationships through an agreement. In contrast with other legal devices and agreements, a memorandum of understanding is less formal but has more importance than a handshake between two parties. The document of memorandum of understanding is commonly used by businesses to maintain international relations and also for business negotiations. A memorandum of understanding is an agreement which can be between two or more parties.

Memorandum of Understanding is commonly referred as MOU, MoU, Memorandum of Understanding Form and MOU Agreement.

Is Memorandum of Understanding is a legally binding in UAE?

Before drafting a Memorandum of Understanding, it should be decided between the parties involved beforehand which provisions they want to be legally binding and which they don’t want. It is highly essential that all parties are in agreement about this.

As far as the laws of UAE are considered, Article 141 of the UAE Civil Code states that:

“If the parties agree on the essential elements of the obligation and the remainder of the other lawful conditions which both parties regard as essential and they leave matters of detail to be agreed upon afterwards but they do not stipulate that the contract shall not be regarded as made in the event of absence of agreement upon such matters, the contract shall be deemed to have been made, and if a dispute arises as to the matters which have not been agreed upon, the judge shall adjudicate thereon in accordance with the nature of the transaction and the provisions of the law”.

The above statement by UAE Civil Code doesn’t clarifies what “essential” elements of a contract could be which puts the parties at a risk of agreeing on elements as regarded “essential”, making them legally bound to all terms of the agreement. They can however prevent themselves by explicitly mentioning the elements in the agreement where the terms are not legally binding between them.

What are the reasons to use a Memorandum of Understanding?

The four major reasons that lead businesses to consider having a Memorandum of Understanding are as follows:

A business that intends to partner with another business may need an MOU
A small business that frequently partners with other small and big businesses may need to use an MOU
Another business that intends to work with you – for this you may need an MOU
Two businesses who want to work together on a specific project may need an MOU

What does a Memorandum of Understanding must include in it?

Although there is no specific or standard format about the inclusions of details in a Memorandum of Understanding, following are basic details that every MOU should have:

Scope of MOU
Information regarding the project
Details of involved parties
Responsibilities of each party
Date from which the agreement comes in effect
The tenure of agreement
When and/or How can a party terminate the agreement

What are the advantages of using a Memorandum of Understanding?

There are many benefits of using a memorandum of understanding. It gives all parties involved a clear objectives about mutual goals and intentions. As the objectives in an MOU are so clearly defined, it prevents parties from future disputes. Since MOU already contains prospective goals and objectives for your business and mutual interest of the parties involved, this document can be easily used to create formal and legal contracts for future.

What are the disadvantages of using a Memorandum of Understanding?

One of the biggest disadvantages of an MOU is that it is not a legally binding document so any kind of disagreement or violation by either of the parties involved cannot be treated legally. A common disadvantage of it not being legally binding is any of the parties exiting the contract without meeting the outlined responsibilities.

How does a Memorandum of Understanding work?

Before preparing a memorandum of understanding, all parties must have clarity about the provisions they wish to include in the document. In this way, all parties will have a complete and effective agreement. Ideally, all parties must create their own MOUs first defining the following elements:

Expectations
Desired outcomes
Results they would not settle down for
Why do they think stakeholders can benefit from the MOU

Need assistance with drafting of Memorandum of Understanding in UAE?

Notary Public Dubai has a skilled team of legal consultants and associates who are experienced in notarizing essential documents for business documents. If you are searching for a reputable legal advisory firm for the notarization of power of attorney in UAE or need to draft a memorandum of understanding for your business, contact Notary Public Dubai today!

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