This is a question I am often asked by clients. My simple answer to the question is – No, generally they are not legally binding agreements. I often describe it as an “Agreement to Agree”.
Why are Memorandum of Understanding used and what is their purpose?
The simple answer is that a Memorandum of Understanding can be a very useful mechanism to outline between parties what their expectations are during a negotiation without having to be legally bound.
It is generally a precursor to entering into a legally binding agreement.
In the commercial world MOUs are often used and particularly when dealing with international transactions. They are often favoured by international clients when exploring opportunities before committing formally.
When is an MOU legally enforceable?
An MOU will only be legally binding if it satisfies all the relevant elements of a binding contract.
For example:
- Did the parties intend to create a legal relationship?
- Was there an offer and acceptance by the parties?
- Did the parties consent to enter into a formal contract?
- Was there consideration exchanged?
- Are the terms so clear that the parties intended to be bound legally?
- Did the parties have legal capacity?
- Have the parties agreed on a jurisdiction to govern the relationship?
What should an MOU contain?
As indicated above each MOU should reflect the unique nature of the relationship.
The MOU should reflect the understanding of the parties intentions and will include such information as:
- The details of the parties
- Any agreement or considerations as to due diligence
- Exclusivity undertakings not to negotiate with other parties during the term of the MOU
- Confidentially provisions
- Distribution and responsibility of costs as to each party
- Key terms and the pathway to completion or signing formal and binding documentation
- Statement as to whether it is legally binding or not
How can FC Lawyers help?
At FC Lawyers we have extensive experience in the negotiation of commercial transactions and in particular MOUs as a tool to outline our clients’ expectations in a negotiation.
Contact our team to discuss your needs.
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