A memorandum of understanding (MOU), also sometimes referred to as a Letter of Intent (LOI), is a document that describes an arrangement between two or more parties. MOUs are commonly used by various sectors, including closely held companies, to formalize collaborations and outline the framework for cooperation. It is a more formal alternative to a gentlemen’s agreement. MOUs are generally not legally binding, but they do indicate the establishment of an informal business relationship. MOUs serve as preliminary legal documents that help define the roles and responsibilities of the involved parties before contracts are finalized.
An MOU often precedes a definitive, legally binding agreement. MOUs are often used in the early stages of negotiations to outline the intention of the involved parties before a formal agreement or legal contract is drafted. MOUs are commonly used in Cypriot law once negotiations of a merger or acquisition have been concluded with a certain degree of certainty. An MOU is formally drafted once the parties feel comfortable setting out in written form the main terms on which they wish to proceed with their transaction.
MOUs are not intended to be legally binding; however, if certain clauses, such as an exclusivity or confidentiality clause are inserted, then the document may become legally binding. The exact nature of an MOU depends upon the parties’ intentions and the language used, which determines whether the parties intended to be legally bound. The period of time each clause is legally binding depends upon the circumstances of each provision.