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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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.
You may see a memorandum of understanding referred to by a variety of different names, including:
An MOU between two construction companies typically looks like this:
This is done by having each party draft their own version of the memorandum, which should include the following details:
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.
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.
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:
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:
A memorandum of understanding should include the following information:
The specifics of the required information are as follows:
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 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.
It is important to remember that a memorandum of understanding is not a construction contract.
A memorandum of understanding, on the other hand:
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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