Last Updated on December 19, 2022 by Anda Malescu
Differences between a joint venture agreement vs. a memorandum of understanding
There are many differences between a joint venture agreement vs. a memorandum of understanding even when they are completed at the same business meeting. While a joint venture agreement is a business arrangement in which two or more partners join their resources for the purpose of accomplishing a specific task, a memorandum of understanding is a document that is used in the early stages of negotiation between the partners of a joint venture agreement. Therefore, chronologically speaking, the memorandum of understanding is completed prior to the joint venture agreement. However, this is not the only difference.
Joint venture agreements are usually entered into for the purpose of accomplishing a new project or another business activity
In a joint venture, each partner is responsible for profits, losses, and costs associated with the joint venture. There are two types of joint ventures – a joint venture that becomes a distinct legal entity and a joint venture created by contract. Regardless of which type, the most important aspect of a joint venture is the joint venture agreement. In this document the parties provide for the objective and purpose of the joint venture, the rights and obligations of the partners, the operations, and the profit-sharing and loss responsibility, among others. It is important to point out that drafting such a document is a crucial aspect in the performance of a joint venture. A well-drafted joint venture agreement can help the parties whenever a dispute may arise.
A memorandum of understanding is a non-binding document that facilitates the early stages of negotiations between parties that intend to enter into a joint venture agreement. It can be written by either party involved in the agreement, and it is usually proposed by the party that is leading the negotiation process. While the joint venture agreement represents a binding contract between the parties, the memorandum of understanding is a document that only lays out the parties’ intentions and understanding.
The memorandum of understanding is usually the first step in the formation of the joint venture agreement. A memorandum of understanding is not usually binding because the content is not as specific as a typical contract. As a result, it is difficult to enforce such document. A memorandum of understanding usually contains only key aspects that parties have an interest in. This type of document and the information it comprises is usually clarified in the joint venture agreement.
However, even if a memorandum of understanding is not a binding contract, it still involves a certain degree of significance and respect towards the other party. In this respect, a memorandum of understanding is stronger than a gentlemen’s agreement.
To summarize, the key differences between joint venture agreement vs. memorandum of understanding are:
- The joint venture agreement is a binding contract and the memorandum of understanding is not a binding contract;
- The joint venture agreement is legally enforceable, and the memorandum of understanding is usually not;
- The joint venture agreement is drafted after the memorandum of understanding;
- The purpose of the venture agreement is usually to perform a specific task, while the purpose of the memorandum of understanding is to establish the first step in the negotiations between the joint venture partners;
- The joint venture agreement presents a higher standard of specificity than the memorandum of understanding, which only contains key aspects of the deal.
Contact us or schedule a consultation with your corporate lawyer in Miami, Florida USA to help you understand the differences between the joint venture agreement vs. memorandum of understanding, and assist you with their execution.
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