MOUs: Binding or Not?

A Memorandum of understanding (“MOU”), is a document entered into to set out the preliminarily understanding of parties who intend to enter into a formal contract at a later date. In some jurisdictions, it is known as “letter of intent”. The Black’s Law Dictionary considers an MOU as a letter of intent, and goes ahead to say that it is a “ written statement detailing the preliminary understanding of parties who plan to enter into a contract or some other agreement or a committal writing preliminary to a contract”. An MOU, also informally considered as “an agreement to agree” or a “pre-contract” is a simple document and not as detailed as a contract. It, however, provides the framework to guide the parties in undertaking a project or working arrangement.

Parties to this kind of agreement could be individuals, companies or states. For inter-state relations, it is difficult for two or more governments to contract with each so an MOU is an instrument easier to execute.

The controversy surrounding this type of agreement is whether it is legally binding on parties and can be enforced in a court of law. In a recent Ghanaian Supreme Court case[1] the respondent entered into an MOU with the 1^st applicant to become a shareholder in the 2^nd applicant company. Based on the MoU, the respondent made a shipment of machinery, equipment, and vehicles from Angola to the 2^nd applicant in Ghana. However, before the MoU could be translated into an agreement between the parties with regard to the respondent’s actual shareholding in the 2^nd applicant/company, a misunderstanding arose between the respondent and the 1^st applicant. The respondent contended that the 1^st applicant had misrepresented certain facts to him about the real status of the 2^nd applicant so he was no more interested in the acquisition of the shares as agreed upon in the MoU. The supreme court, however, did not pronounce on the enforceability or otherwise an MOU. This piece is therefore aimed at throwing light on this issue.

Generally, MOUs, whether entered into in a private commercial setting or inter-state setting, are not deemed to be legally binding. They are usually entered into when parties are not making promises which either would want to legally enforce in a court or through some other legal process.

The law as to whether an MOU is enforceable or not remains largely unsettled and is subject to adjudication by the Courts.

For lack of Ghanaian authorities on the subject, I will make references to cases from other common law jurisdictions.  In the Kenyan case of Eldo City Ltd vrs Corn Products Kenya Ltd,[2] it was stated by Judge Mabeya that “As to the question of whether MOUs are legally binding, I would state that the same is partly a matter of construction of the particular document and partly a question of legal analysis.” It is, therefore, a question of fact and the party seeking to rely on the MoU has the burden of persuading the court that such an agreement exists and was in the circumstances binding.

The courts have in some circumstances held that only some parts of an MOU are binding. These are usually parts which do not give any room for further negotiations. This is illustrated in a recent case, Georgian Windpower Corporation et al v. Stelco Inc,[3] decided by the Ontario Superior Court of Justice. The parties entered into a two-year MOU which was terminated by the defendant, before the end of the two-year period.  The Court acknowledged that MoUs are usually not binding but went ahead to award damages to the plaintiff for the wrongful termination of some but not all of the terms of the agreement. The Ontario court held that the agreement had binding and non-binding parts, and the parties therein intended to make only some parts of the MOU enforceable.

Despite the general unenforceability of MoU, the courts have in some situations upheld and enforced MoUs.

Intent of parties:

An agreement becomes enforceable when there is evidence that the parties intended to create a legally binding agreement.[4] Thus, whether an MOU is enforceable or not depends on the intent of the parties. One of the cardinal principles of construing non-statutory documents is deciphering the intention as expressed in the document or as can be gathered from the four corners of the document. [5] The intention of the parties to make the MOU enforceable can be easily discerned if express words are provided to that effect.  If the parties through the language employed or the circumstances show intent to make the agreement legally binding, courts can hold that the parties effectively entered into a contract. It has been suggested that the use of mandatory or imperative words like “shall”, “must” denote an intention for the parties to be bound as it imposes an obligation on the parties.  Also clauses in MOUs which makes provision for means of enforcement in the event of any breach by either party give an indication of the parties’ intention to be legally bound.

Equity:

An MOU may be considered as an enforceable contract under equity in many forms. There is a longstanding maxim of equity that “equity looks at the substance rather than form”. In the same vein, if the agreement is described as an MOU but in substance and from all indications is an enforceable contract, the courts will enforce the apparent MOU as a contract with its attendant legal consequences.

If the intention of the parties is not easily discernible from the agreement, but the terms are clearly defined, and the MOU is supported by consideration, there is a strong presumption that the parties intended to create a legally binding contract, despite the description of the document as an MOU.[6]

Where the parties make serious promises to each other expecting such promises to be fulfilled or performed, the courts will hold it unconscionable for such agreement to be non-binding. This is because a party might have relied on the promise to change his position to his detriment. This principle sounds in promissory estoppel and has been defined to be an equitable doctrine that prevents the withdrawal of a promise by a promisor if it will adversely affect a promisee who has adjusted his or her position in justifiable reliance on the promise[7]. This doctrine was also justified by an Indian case[8], wherein the court made a statement that the doctrine of promissory estoppel is a principle evolved by equity to avoid injustice and so whereby a promise has been made by a person knowing that it would be acted upon by the person to whom it is made, and in fact it is so acted upon, it is inequitable to allow the party making the promise to go back upon it.

Where conditions for a contract are duly satisfied:

A contract recognizes a legal duty in that, if a party fails to comply with his or her side of the bargain, the other party can enforce the contract in the courts for a remedy in the form of damages and equitable remedies like specific performance and injunction. This is generally not so for an MOU as it is considered as a document of goodwill made before a formal contract is entered into.

An MOU as has been mentioned earlier is not a contract properly so called, which is usually enforced by a court of law. But where an  MOU satisfies all the essential conditions of a valid contract, namely: the presence of an offer and acceptance, intention to create legal relations, the capacity of the parties to contract and consideration, it would be enforced in the same way as a contract. Indeed, that is the approach taken by the Indian Courts.

Where the MOU contains all the material terms:

The courts try to enforce promises where they are set forth with reasonable certainty and has all the material terms needed for a contract. It has been held that in order for a “contract to contract” to be enforceable, it must include all the material terms of the agreement, leaving nothing for future negotiations. [9]

Such was the case with Juliano v. Smith[10], which involved an MOU signed between two investors and two other companies. The investors brought an action against an officer and director of one of the companies for endangering the company’s ability to do business and therefore causing a decline in the value of their investments. The MOU included a clause saying that the parties had “reached an agreement,” the terms of which were to be detailed in a settlement agreement that was supposed to be created at a later date. However, despite this agreement, the parties failed to execute a final settlement agreement, and so the court upheld the MOU as a final settlement agreement instead. The officer appealed and it was determined that the MOU was enforceable because there was a meeting of mind between the parties and it contained all of the important terms of the agreement and leaves nothing outstanding for negotiation.

 What is the way out of this confusion?

It is pertinent for the parties to exercise caution when drafting MOUs. Particular attention must be paid to the language employed in drafting the agreement, the use of titles and the types of clauses included. For instance, the use of the word “shall” might give a binding effect to the MOU and use of the word “may” a non-binding effect. It has been suggested that clauses such as jurisdiction clause, governing law clause, indemnification should be given binding effects so they can survive the MOU.

Parties should clearly state whether the terms of an MOU are binding or not. It is critical for parties to agree whether they intend to be bound by the document, and this decision should be made at the time of preparing the document. If the parties are sure that the terms contained therein are final and leaves no room for negotiation, a formal contract would be a better option. In all other cases, the agreement should indicate which parts are enforceable and which parts are not.

[1] of Antonio Olimpio Santos Felix vrs Giovanni Antonnelli & Biglebb Construction and Crushing Limited CIVIL MOTIONJ8/99/2017

[2] High Court, Nairobi Civil Case No. 37 Of 2013)

[3] 113 O.R. (3d) 81,

[4]https://blog.clausehound.com/what-is-the-difference-between-a-contract-and-a-memorandum-of-understanding/

[5] Biney v Biney [1974] 318

[6] http://www.vgso.vic.gov.au/content/memoranda-understanding

[7] Cheeseman, Henry R., 2001, Business Law, Ethical, International & E-Commerce Environment, Fourth

Edition, Upper Saddle River, Jew Jersey 07458, p. 220.

[8] Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh 1979 SCR (2) 641

[9] Hansen v Catsman, 371 Mich 79, 82.

[10] Oakland Circuit Court; LC No. 2010-110121-CB