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Acronym for memorandum of understanding. An MOU is in principle a non-binding agreement between two parties, typically written in the course of contract negotiations as a preliminary to drafting a definitive agreement. Typically an MOU will contain a clause specifying some or all of the MOU as not binding—though most commonly that clause makes an exception of choice of law and forum provisions and frequently confidentiality provisions as well.
The practical legal effect of MOUs is typically poorly understood. While in principle the MOU is non-binding, it can as practical matter become part of the contract; for example; if the definitive agreement is vague on a point, depending on the application of the parol evidence rule, the MOU is likely to be consulted to help interpret the definitive agreement. More significantly, if no definitive agreement is in fact made and the parties go forward with the business arrangement contemplated in the MOU, it will almost inevitably be considered as strong evidence as to what the unwritten contract between the parties in fact consisted of. In this way, MOU’s can come to bind the parties. LOU or letter of understanding is a synonym.