Memorandum of Understanding Between Companies: Key Clauses Not to Overlook
Many business relationships begin with a simple statement: “Let’s cooperate first and arrange the details later.”
This is where the importance of a Memorandum of Understanding – MOU becomes clear. It is not necessarily a final contract, but neither is it merely a ceremonial document without legal effect.
The careful drafting of an MOU may determine whether the parties remain at the negotiation stage or have in fact created legal obligations that may be enforced.
In technology and artificial intelligence projects, this issue becomes even more important because cooperation may involve exchanging data, confidential information, technical models, business know-how, and intellectual property rights before the final contract is concluded.
First: Define the Legal Nature of the MOU
This is the most important clause.
The MOU should clearly state whether it is:
Non-binding as to the cooperation itself, expressing only the parties’ intention to study and negotiate the project;
or whether some provisions will be binding from the date of signing, such as confidentiality, data protection, intellectual property, and dispute resolution.
In many cases, the more accurate approach is to combine both: the decision to implement the project and conclude the final contract remains non-binding, while provisions protecting the parties during negotiations become binding.
This issue is consistent with the Saudi Civil Transactions Law, which provides that merely negotiating a contract does not, in principle, create an obligation to conclude it, while establishing liability for negotiating or terminating negotiations in bad faith. Agreement on essential matters may also have legal effects extending beyond mere negotiations. Accordingly, the wording of the MOU should not leave this issue open to interpretation.
Second: Define the Purpose and Scope of the Cooperation
A common mistake is to use broad wording such as:
“The parties will cooperate in the fields of technology and artificial intelligence.”
This wording may serve as a starting point, but it is not sufficient to regulate the relationship.
The MOU should preferably identify the intended form of cooperation: development of technology solutions, systems integration, provision of services to customers, development of a joint product, data analysis, training, or merely the study of future business opportunities.
The clearer the scope, the lower the possibility that either party will consider the other bound by something it never intended.
Third: Define Each Party’s Role
An MOU should not be limited to describing the project; it should clarify who will do what.
In a technology project, for example, one party may be responsible for technical solutions and developing artificial intelligence models, while the other provides project requirements or data, or access to the market or customers.
However, defining roles in an MOU should not unintentionally become a final commitment to provide the service.
It is therefore important to distinguish between proposed roles for studying the cooperation and obligations that arise only after a separate contract or work order is signed.
Fourth: Implementation Agreements and Financial Consideration
A well-drafted MOU should answer an important question:
When do actual financial obligations begin?
It is preferable to state clearly that any project, trial, custom development, or paid service will begin only after signing an implementation agreement or work order specifying at least the project scope, deliverables, duration, fees, payment dates, and acceptance criteria.
Leaving this issue open may later lead to a dispute over whether meetings, preliminary studies, or pilot work were free services or work deserving compensation.
Fifth: Confidentiality
Companies often begin exchanging sensitive information before signing the final contract.
This information may include prices, business plans, customer lists, financial data, technical models, source code, algorithms, and market strategies.
The MOU should therefore specify what constitutes confidential information, who may access it, the purpose for which it may be used, how long the confidentiality obligation will continue, and what happens to the information after negotiations end.
A commercial project may fail, but that does not mean the information exchanged has become available for use.
Sixth: Data and Artificial Intelligence
This has become one of the most important provisions in technology MOUs.
Cooperation in artificial intelligence does not automatically mean that one party may use the other party’s data to train or develop models, or upload it to external platforms or services.
There should be clear answers to questions such as:
Who owns the data?
Who may access it?
For what purpose may it be used?
May it be used to train an artificial intelligence model?
Will it be processed by a third party?
And where will it be hosted?
Where the data includes personal information, its handling is also subject to the regulatory requirements for personal data protection, including identifying the purposes of collection, processing, retention, and disclosure, as well as other obligations prescribed by law.
Accordingly, a general statement such as “the parties may exchange data necessary for the project” may be insufficient for a modern technology project.
Seventh: Intellectual Property
One of the most difficult questions arises when the parties work together on a new idea, model, or software:
Who owns it?
The pre-existing intellectual property of each party should first be protected. Software, tools, models, algorithms, and technical know-how owned by a party before the cooperation should not transfer to the other party merely because the MOU was signed.
The ownership of any product or deliverable developed in the future should then be addressed in a clear agreement specifying:
Will ownership belong to one party?
Will it be jointly owned?
Or will the developer retain ownership and grant the other party a licence to use it?
Failing to address this point at the beginning of the relationship may turn the project’s success itself into a source of dispute.
Eighth: No Partnership or Agency
Cooperation between two companies does not necessarily create a legal partnership between them.
It is therefore important to state that the MOU does not establish a company, joint venture, agency, or representative relationship, and that neither party may make undertakings, sign contracts, or assume obligations in the name of the other party except under a separate authorisation.
This provision becomes more important if the parties will appear together before customers or in the market.
Ninth: Exclusivity
Can each party cooperate with other companies operating in the same field?
If the answer is yes, it is preferable to state expressly that the cooperation is non-exclusive.
If either party wants a particular exclusivity arrangement, it should not be expressed in general terms. Its scope should be defined precisely by activity, territory, customers, duration, and the corresponding obligations.
Broad and undefined exclusivity may turn from a means of protecting the cooperation into a significant commercial restriction on one of the parties.
Tenth: Term and Termination
An MOU should not continue indefinitely.
A clear term, renewal mechanism, each party’s right to terminate, and the method of giving notice should be specified.
Most importantly, the MOU should state what remains effective after termination, particularly obligations relating to confidentiality, data, and intellectual property.
The commercial end of the relationship does not necessarily mean the end of all its legal effects.
Finally: Governing Law and Dispute Resolution
It is preferable to identify the law governing the MOU and the forum with jurisdiction over any dispute arising from it, particularly where the parties are based in different countries.
The parties may also agree to an amicable negotiation stage before resorting to litigation or arbitration.
Leaving this matter unregulated may mean that the first dispute between the parties begins with another dispute over where the dispute should be heard in the first place.
Counselo’s Perspective:
A good MOU does not try to become a final contract prematurely, nor does it settle for general wording that protects no one.
Its primary function is to regulate the space between the idea of cooperation and the final contract.
At this stage in particular, four questions should be answered clearly:
What have we agreed on?
What have we not yet agreed on?
What has become binding from now?
And what happens if the parties do not reach the final contract?
The clearer the answers to these questions are from the outset, the safer and more stable the transition from negotiation to contracting will be.
Counselo | كاونسلو
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