Despite the nature and primary usage of an MOU, it has evolved albeit erroneously in our opinion as the "One Size Fits All" agreement for almost every conceivable transaction. From experience, the MOU has arguably become the most common "agreement" amongst legal practitioners and the most demanded "agreement" by parties generally for the legalization of their position.
This, by itself, may not be an issue, particularly where the actual terms of the MOU with particular reference to the language and the certainty are clear and the parties intend such agreement to be binding. After all, an agreement between two contracting parties which contains all the elements of a contract will be enforceable by the parties irrespective of the name it is so called. Accordingly, an MOU can serve as a definitive agreement where the parties have moved beyond the preliminary stages of the contract and it is clear from the wording of the MOU that the parties intend it to be the full and final documentation, enforceable by and against them, in accordance with its terms.
However, complexities often arise where an MOU is intended to function as a definitive agreement but does not capture the agreed terms and complete intention of the parties or is made subject to the fulfilment of certain terms and conditions.
It has been held that where an MOU is subject to the fulfilment of certain terms and conditions e. Indeed, where the MOU does not reflect the agreed terms of the parties, it is likely to be ambiguous; and the vaguer such an MOU is, the less likely its worth.
In other words, a document which is made subject to the execution of an agreement at a later date, is merely a preliminary move in negotiations which may or may not lead to a formal contract. As discussed above, an MOU by its primary nature and usage is nonbinding. However, in cases where the MOU contains the elements of a valid contract, the MOU will fall within the exceptional circumstance wherein a Court will find that commitment has been made between the parties, notwithstanding its general nature, and it will be held to be binding and enforceable 6.
The MOU was made subject to signing a formal agreement by the parties, which was contemplated to occur within 14 days of the execution of the MOU. However, and before the execution of a formal agreement by the parties, the Appellant had incurred costs for the execution of the project based on the reliance on the promises, assurances and representations of the Respondent that a formal agreement will be executed in line with the MOU.
In determining if the MOU represented a binding and enforceable contract between the parties, the Supreme Court differentiated what constitutes a valid contract in contrast to an invitation to treat, and held that for a contract to be binding, it must contain the basic elements of offer, acceptance, consideration and capacity to contract or intention to create legal relationship, as opposed to an invitation to treat which is not an offer that can be accepted to lead to a contract.
In other words, the parties to the agreement must be in consensus ad idem as regards the terms and conditions freely and voluntarily agreed upon by them". Following from the above, it is clear that a Memorandum of Understanding is generally nonbinding and unenforceable. However, the courts will enforce a Memorandum of Understanding that contains all the requirements of a valid contract i.
Furthermore, in deciding its enforceability, the court will take into consideration, the intention of the parties which will be interpreted from the terms of the MOU and the conduct of the parties after its execution. Although there are legal distinctions between a definitive Agreement by whatever name so called and a Memorandum of Understanding, there may be no legal or practical difference if they are written with similar language.
The key is to focus on whether the parties intend to be legally bound by the terms of the agreement and if so drafted, a legally enforceable contract would have been created regardless of whether or not it is called a Memorandum of Understanding.
However, considering the ambiguity that abound the binding-ness and enforceability of an MOU, it becomes almost difficult to rationalize the unguided widespread resort to an MOU by lawyers, where specific, time tested agreements would be more apt to capture the agreed, final and definitive position of the Parties.
Although there are clear theoretical differences between a contract and a memorandum of understanding, the practical differences between these two agreements can be limited by party intent.
An agreement becomes enforceable when there is evidence that the parties intended to create a legally binding agreement. Thus, the enforceability of a memorandum of understanding depends on the intent of the parties. If the parties do not wish to make their agreement legally binding, Courts will not enforce the document.
If the parties, however, show intent to make the agreement legally binding, Courts can rule that the parties effectively entered into a contract. This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Orginally posted at Clausehound. Search form Search. Login Purchase Options. Need help with a legal contract? Post Your Project It's Free.
Get Bids to Compare. Hire Your Lawyer. What Is a Memorandum of Understanding? Other Names for a Memorandum of Understanding You may see this type of document referred to by a few different names. Here are a few common reasons for using an MOU: You own a business and plan to partner with another business.
You own a small business and frequently partner with others. Another business has asked about working with your business. Your company and another business want to work on a specific project together. Buy Template. E-mail Address. We'll hold your data according to our Privacy Policy. Need Additional Help? Would you like help completing the MoU template? Upgrade your purchase to include support from a licensed attorney to help you complete your MoU and answer any questions you have.
Thank you for your order. A member of our team will be in touch shortly with payment instructions to complete your order. Joint Venture MoU. Used for potential Joint Ventures or Business Partnerships. Service Agreement MoU. Used for potential Service Agreement with new customer. Outsourcing MoU. Used for potential outsourcing agreement for new vendor. Asset Purchase MoU. Share Purchase MoU. Used for potential share purchase of existing shares.
Business Relationship MoU. Used for potential new Business Relationship with another party. How ContractsCounsel Works. Hiring a lawyer on ContractsCounsel is easy, transparent and affordable. Post a Free Project. When drafting a document to set out a business relationship, it is important to be clear from the start about what the relationship is between the parties.
The first thing to consider is whether or not the arrangement is legally binding. Calling the document an MoU may make it sound less intimidating but the risk is that the parties do not get legal advice to understand the terms, or try to negotiate the terms before signing.
An MOU can be used to establish a framework for the collaboration between businesses and express the common vision of the parties to the MOU who want to work together.
If you want to enter into an MOU to start a business relationship and work towards a legal agreement, an MOU can make the arrangement clearer to the parties so as to speed up the process of negotiation in relation to the final legal agreement. But do not feel pressured to sign an MOU at the end of a business meeting. To be clear that your document is intended to be an MOU include a Statement of Understanding along the lines of the following:. If you are entering into a business relationship, you should always get professional legal advice to help you understand the terms and negotiate.
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