When partnering with another institution, organization, business, or individual on a project, it is important that each party fully understands their responsibility for the project. This is why it is important to have partnership agreements and memorandums of understanding in place.
Both of these documents, while distinct, serve the same purpose. Both documents outline what each party agrees to contribute to a partnership, a timeline for the desired outcome, as well as payment structure. In this brief piece, you will find why both documents are important, what they entail, and how they can save you emotional and financial hardships when doing business.
What is a Memorandum of Understanding?
A memorandum of understanding (MOU) is a non-binding written agreement between two parties that allows each group to outline their expectations of the project and its deliverables. This type of agreement is also referred to as a “letter of intent’.
When should you draw up an MOU?
This is a very important question. It is best to draw up a Memorandum of Understanding when you are about to enter into a business relationship with another party. This is often considered the first step towards a formal agreement via a binding contract.
A Memorandum of Understanding clearly spells out how the parties will work together, their responsibilities, key performance indicators, as well as expectations and timeline for the partnership/project. The whole point of an MOU is for both parties to fully have an agreed understanding of the objectives and responsibilities of both parties.
What to include in your MOU?
This agreement will look slightly different, but a good rule of thumb is to use MOUs as an agreement to agree, not as the final word. You should include whatever terms you feel are necessary to establish a mutual agreement about the common line of action you both will follow. This often includes:
- Purpose of the partnership
- Goals of each party
- Duties of each party
- Timeline
- Confidentiality clause
- Process for resolving disputes.
It is important to note that memoranda of understanding are not enforceable contracts because no offers are presented and no transactions are made. This is why, after drawing up an MOU, you need to have a partnership agreement to cement the deal.
what is a Partnership Agreement?
A partnership agreement is a legal contract that contains the terms and conditions that govern the way the partnership will be operated between parties involved in starting a partnership structured business for the avoidance of any conflict between the partners.
What should a Partnership Agreement entail?
Partnerships are usually regulated differently across different jurisdictions. Nevertheless, for the purpose of drafting and executing a valid agreement, certain elements and clauses must be present in the agreement. These clauses/elements include the following:
- Name of the partnership (i.e., the name contained in the certificate…)
- The full names and descriptions of all parties involved in the partnership.
- The general and specific nature of partnership business to be operated.
- Place of business of the partnership and branches, if any.
- Time of the commencement of the partnership.
- Capital & Capital contribution: there is a presumption of equality in the absence of a contrary intention. All the partners are entitled to share equally in the capital of the business and must contribute equally to the business. This is the position implied by law in the absence of an express provision to the contrary. If the partners intend otherwise, then instructions should be taken to include a clause in the agreement which will provide the proportions or percentages of the partners’ share in the capital and their contributions thereto.
- Sharing of profits and losses: the formula for this must be expressly stated or the law will imply equal division.
- Partnership property
- Remuneration of partners
- Suspension and expulsion of partners
- Admission of new parties.
- Duration
- Sustenance of duration of partnership through the admission of new members.
- Dispute resolution: there should be a clause that provides for the means of resolution of disputes between the partners, either by resorting to alternative dispute resolution (ADR) or litigation.
- Retirement
- The execution clause.