If you are interested in Partnerships, it is vital to know the basics about the various agreements involved in forming Partnerships. We have summarized the most important ones below:

Memorandum of understanding (MOU)

A memorandum of understanding (MOU) is an agreement between two or more parties, so as to establish common objectives, and formal partnerships. MOUs are not legally binding, and do not involve the exchange of money, but carry a degree of intention, flexibility, expectation, and mutual respect, that is stronger than a gentlemen's agreement.

Gentlemen's agreement

A gentlemen's agreement is a legally non-binding agreement between two or more parties. It is oral, or written, or through a mutually beneficial etiquette, like a handshake. The essence of it is that it relies upon the honor of the parties for its fulfillment, rather than being in any way enforceable. It is, therefore, distinct from a legal agreement or contract.


A contract is a detailed and legally-binding agreement which recognizes and governs the rights and duties of the parties to the agreement. A contract is legally enforceable because it meets the requirements and approval of the law.

It protects the interests of both parties and ensures trust. It typically involves the exchange of goods, services, money, or promises of any of those. In the event of breach of contract, the contract law awards the injured party access to legal remedies such as damages and cancellation.

In the Anglo-American common law, formation of a contract generally requires an offer, acceptance, consideration, and a mutual intent to be bound. Each party must have capacity to enter the contract. Most oral contracts are binding, but some require formalities in writing or by deed.

In civil law, contract law is a branch of the law of obligations.

Letter of intent

A document similar to a MOU, called a Letter of Intent is often used to show intent to purchase all or part of a company. Like a MOU, it is a document that outlines a future agreement.


Well-written MOUs reflect diplomatic savvy and creative analytical thinking. They should provide a mutually beneficial framework and a collection of vital points of accord that both entities can work within to achieve shared goals.

After the initial draft is written, the parties meet in person to negotiate the MOU's finer points. Many MOUs spell out:

  1. how long it lasts,
  2. privacy statements,
  3. communication details,
  4. how to terminate the MOU,
  5. disclaimers and restrictions,
  6. when the agreement begins,
  7. dates for performance reviews,
  8. processes for dispute resolution,
  9. contact information for each party's representatives,
  10. descriptions of both parties' capabilities, and how they relate to each other's' interests.

Once agreed upon those details, both parties sign the MOU. This information can resemble the terms of a legally binding contract, but MOUs typically are not enforceable.

However, there are exceptions and stipulations that can spell serious legal consequences for parties who break memoranda of understanding. If the content of the MOU is exactly like a contract in language and intent, then a court is likely to call it a contract, no matter what title might appear on the front page. This issue arises often, when parties attempt to manipulate the language of a MOU to resemble a contract without the risks of actual contractual obligations.

Although MOUs are not binding, they may include provisions that are, such as privacy or nondisclosure agreements. If either party violates such provisions, they may be held liable.

There are standards for determining whether a MOU might be binding. A judge reviewing one would look for 4 key elements that normally define a contract:

  1. an offer,
  2. acceptance of the offer,
  3. an intention to be legally bound, and
  4. consideration (the benefits that each party bargains for as part of a contract).

A judge weighs such factors when determining whether the MOU is actually an enforceable document. If the MOU's terms are clear and coherent, and reinforced by consideration, then a judge would likely find the MOU to be a binding agreement, no matter what it is called.

Therefore, parties are very careful to make sure their MOU can in no way be interpreted as a contract. They do so by including disclaimers and phrases such as "This memorandum is not intended to and does not create any contractual rights between these parties."

In a business environment, these informal agreements lack the formalities and standardizations of a contract that would protect both parties during the project. As a result, legal remedies might be nonexistent in the event of a lack of adherence to the MOU, or non-performance.

MOUs are very useful, such as circumventing bureaucracy, and skillfully dodging massive amounts of red tape.

MOUs skirt processes that would otherwise slow down implementation and cooperation, thus helping parties to get things done much more quickly.

Although some interagency relationships can be formed and maintained by informal understandings between executives and workers, others are more complicated and require a paper trail. That's where MOUs come in.

In the U.S., the SEC has increasingly relied on MOUs to investigate people and companies who operate abroad in attempts to flout U.S. financial laws. MOUs help regulators avoid time-consuming treaty procedures and provide a faster, more flexible means of international securities regulation.

MOUs are an established form of written communication that provides a powerful means for accelerating business projects, beating deadlines, and implementing governmental polices all over the world. They are also called memoranda of agreement and precede Preliminary Agreements.

Preliminary Agreement (PA)

Preliminary Agreements are entered into before all parties’ potential risks have been analyzed, quantified, and remedied, and before the parties are willing to commit any time- or monetary resources to engage in a formal contract.


PA's are "process oriented", because they set out the parties' expectations about the next phase of activity and provide just enough protection to the parties that they may be willing to invest time and share more detailed information and continue discussions without overly committing themselves.

Only the parties conducting all the market/product research at their expense may cease negotiations at any time at their absolute discretion until all due diligence has been completed, and are thus not obliged to execute any formal contract that is prepared, if the conclusions reached are not satisfactory.

The other party should commit to the above described process and not breach any of the agreed upon articles of this agreement. In case of non- or mal-performance by this party, the party financing all the due diligence is entitled to compensation, financial or otherwise, for damages incurred.

The amount of monetary remedies for the above incurred damages should normally be discussed and agreed upon, before signing the PA.

These damages may pertain to any of the next 3 categories:

  • expectation damages, for a loss of expected future income from executing the contract, by the party doing the due diligence;
  • reliance damages, for a loss of time and expenses incurred to determine if there is sufficient Return of Investment (ROI) for entering a formal contract.
  • restitution damages for not yet having collected fair financial benefits from freely offering products or services, that have proven to be financially beneficial to the other party in the meanwhile.

Key is to be aware of the fine line between process and binding and non-binding terms, as well as between short- and long-term commitments. These are normally covered in the final agreement or formal contract which also covers all the rights and protections of all parties in explicit detail.

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