No, a Memorandum of Understanding (MOU) is not a deal. More accurately, an MOU is an instrument used in anticipation of a deal entered into between parties intending to enter into a deal.
This article outlines how an MOU works, how an MOU is different to an agreement, and what to consider when entering into an MOU.
What is an MOU?
Fundamentally, an MOU is a pre-contractual instrument documenting an “in principle” understanding between future contracting parties in anticipation of an incoming agreement between them. Specifically, an MOU is used where parties envision that an agreement may potentially be entered into between them, but the agreement between the parties has yet to be formalised.
Based on the above, it is essential to note that an MOU does not always amount to a successful agreement being subsequently entered into by the parties of an MOU. Nonetheless, an MOU is a vital instrument to facilitate parties of the MOU to take the next step to assess whether an agreement is viable between them.
MOU vs Terms Sheet and Heads of Agreement
Similar to a Term Sheet and a Heads of Agreement, an MOU is used as the basis to facilitate future contracting parties to reach and enter into an agreement. While all of the above instruments can be used to guide future contracting parties in the negotiations of an agreement, an MOU is nevertheless more flexible than the other instruments in that it is sufficient for an MOU to set out broad and basic terms of the parties’ preliminary positions.
In particular, an MOU does not need to provide a list of key terms as the basis of future contracting parties’ negotiations (such as in the case of a Terms Sheet and a Heads of Agreement). This is because the content of the parties’ understanding can vary in accordance with the relevant facts and circumstances during the pre-contractual stage.
Thus, the substantive contents of an MOU vary on a case-by-case basis. Nevertheless, an MOU typically contains the commercial intents and purposes of future contracting parties, including how the parties intend to formalise those intents and purposes.
Although an MOU can lack specificity, an MOU is nonetheless beneficial for providing future contracting parties with a broad pre-contractual starting point to determine their future contracting position. In addition, an MOU can also allow parties with the flexibility to adjust the substantial terms of their incoming agreement in accordance with the development of their negotiations.
Example on the use of MOU
An MOU can be used where future contracting parties have intentions to enter into an agreement but have yet to determine the substantive terms under the agreement, e.g. final pricing mechanisms, rights and obligations. Thus, the parties can enter into an MOU to negotiate and determine in greater detail the substantive terms of their future agreement.
In the above case, an MOU would be helpful to document the parties’ general intentions and frame the parameters around how their individual rights and obligations would look contractually. As the parties’ negotiations develop, the MOU would not only guide their negotiations; it would also give the parties flexibility to materialise their contractual intentions accordingly, including allowing them to adjust the substantive terms of the agreement with fewer restrictions than that of a Terms Sheet or a Heads of Agreement.
When is an MOU suitable?
An MOU is suitable for any deal of varying complexities. In particular, parties to simple deals can use the MOU to establish their shared intentions and outcomes while formalising an incoming agreement between them. Further, parties to complex deals can use the MOU to establish the parameters of their rights and obligations at the outset of negotiating an incoming agreement.
Additionally, an MOU can also impose preliminary obligations to parties, such as imposing confidentiality obligations where the parties’ negotiations require the disclosure of confidential information. In a high stakes deal, an MOU can also impose an obligation for the parties to negotiate in good faith to restrict the MOU parties from abandoning the negotiations without good reasons.
Is an MOU enforceable?
An MOU is enforceable in some instances. Ultimately, whether an MOU is enforceable hinges on whether elements of a contract are found under the MOU. In addition, an MOU is likely to be interpreted as enforceable where the wordings of the MOU expressly specify that the MOU shall be binding upon the parties.
Where an MOU is intended not to be enforceable, MOU parties must ensure that the wordings of the MOU appropriately reflect that intention.
As discussed in this article, an MOU is beneficial as a placeholder agreement for future contracting parties to take a further step to enter into or contemplate an agreement with one another.
When entering into an MOU, future contracting parties ought to consider:
- the level of understanding to be documented between the parties at the relevant time of the MOU, to ensure that any gap in understanding is adequately addressed and dealt with by the time the parties enter into the subsequent agreement;
- the enforceability of the MOU, including such as whether the parties intend for the MOU to be enforceable and to appropriately reflect the wordings on the MOU;
- Whether preliminary obligations need to be imposed on the parties, including confidentiality or exclusivity obligations.
**Assisted by; Elvira Limpard**