![]() Traditionally, the common law does not recognise an express agreement in an MOU to negotiate in good faith as a binding contract as demonstrated in the judgement of Courtney & Faribairn Ltd v Tolaini Brothers (Hotel) Ltd. ‘The parties agree that during the negotiation period described in, they will negotiate with each other in good faith in order to endeavour to reach the concluded arrangements described in. The terms of the agreement must also be sufficiently certain.Īn MOU often contains a statement to the effect that the parties undertake to negotiate in good faith with a view to finalising the terms of a formal agreement to be entered into between them. Like all binding contracts, agreements in relation to negotiations must contain all of the elements of an enforceable contract (ie offer, acceptance, consideration and intention to be bound). For this reason, it is possible to include in an otherwise non-binding MOU, legally effective terms which create some sort of obligation on the parties to continue the negotiation process. If however all the terms are agreed to at the time of the MOU, except for uncertainties which are anticipated, the MOU will be held to be binding.Īs mentioned above, an MOU can be expressed to be non-binding as to some of the terms (typically the commercial terms) and binding as to others (terms such as confidentiality and governing law). The general position is that if there are important terms still to be agreed when the MOU is being written, the MOU is unlikely to be binding. However, if the result is a pervasive uncertainty in the document, the MOU will not give rise to contractual obligations as demonstrated in the Australian case of LMI v Baulderstone. It is important to understand that an MOU may still have legal effect even though it contains uncertain terms or the words ‘subject to contract’. For example, terms such as ‘usual terms’ or ‘fair and equitable price’ may be too vague and, depending on the circumstances, the court may refuse to give meaning to them. However, for an MOU to have legal effect, the essential terms must be sufficiently clear and certain. The courts do not expect commercial documents to be drafted with strict precision. A suggested clause would be:Įxcept for the provisions of clauses, this MOU does not constitute or create, and shall not be deemed to constitute, any legally binding or enforceable obligations on the part of any party.’ Accordingly, it is advisable to include a clause in the MOU stating which provisions of the MOU are binding and which are not. However, the use of the words ‘subject to contract’ may not be absolutely conclusive. For example, this may be achieved by using the words ‘subject to contract’. For this reason, if the parties do not wish to be bound by the MOU until the execution of formal documents, then the parties must state clearly and unambiguously their intention not to be bound. For commercial contracts, there will be a strong presumption that the parties intend to create a legally binding contract if the terms of the MOU are clearly defined and supported by consideration. For an MOU, what is particularly important is the intention of the parties at the time of signing the MOU. A contract will be binding if there is offer, acceptance, intention to be legally bound and consideration. Whether an MOU is binding is a question of general contract law. However, it is common practice for an MOU to be part binding and part non-binding on the parties. ![]() This is a decision that will change from project to project. However, the terms that are commonly found in an MOU would include:Īgreement of parties to negotiate in good faithĪgreement to use best or reasonable endeavours to undertake contractual obligationsĬonfidentiality (if not already provided for in a confidentiality agreement)Īt the time of drawing up the MOU, it is important for the parties to decide whether they wish to be bound by the terms of the MOU or not. There are no fixed or usual terms contained in an MOU. It may also distract focus from negotiation of a concluded arrangement. However, entering into an MOU prematurely may limit flexibility in future negotiations. This Article looks at the typical content of an MOU and the practical and legal implications which arise as a result of entering into an MOU.Īn MOU can be very useful in giving commercial (and perhaps legal) certainty or a framework to negotiations and enabling a process to begin (eg raising financing and obtaining approvals). This preliminary agreement is commonly referred to as a memorandum of understanding or MOU for short. ![]() At the outset of a project, parties often record the basic terms under which they agree to work together for the particular project.
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