This article is written by Bushra Asif, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here she discusses “Enforceability of Memorandum of Understanding”.
‘I don’t like MOUs because they don’t mean anything. To me they don’t mean anything.’ President Donald Trump retorted during trade talks with a representative of China in Washington in April 2019, when he was asked by a reporter how long he expected U.S.- China memorandums of understanding to last.
So, are these elusive documents so dispensable in reality – do they really not mean anything? Let us try to establish what is the real standing of a Memorandum of Understanding (MoU).
What is Memorandum of Understanding (MoU)?
A Memorandum of Understanding (MoU), as the word suggests, is a written message of an understanding that parties have agreed upon. It is basically a preliminary agreement between parties regarding a future business venture which is formally written down in a document which has no legal binding. It is often implemented in private law and international law, between both government and non-government agencies and companies. It encapsulates the expression of the intent of negotiating parties.
An MoU can be similar to a letter of intent (LoI) or even a term sheet which also broadly outlines the business deal before detailed points of the transaction can be completed, however, there are slight differences between them. Suffice it to say that it falls somewhere between a handshake deal and a written contract.
Why do we need an MoU – especially when it is not legally enforceable?
The answer varies and the following are the possible scenarios that give an insight as to why people might opt for an MoU rather than a contract. Often used in commercial partnerships to establish the goals and expectations, it is usually used when:
- Ensure all relevant parties are on the same page
- Do not want to form a legal relation
- Want to outline the mutual goals of a prospective business venture
- Due to red tape, you want to avoid delays and proceed with a business project. It helps get things done more quickly than they would through a formal channel of a contract.
- At times it is a legal requirement of certain contracts, e.g – when housing authorities negotiate with tenants.
- To save cost and energy as legal contracts can be cumbersome and need “lawyering” with hard-core hairsplitting term shredding.
What Constitutes an MOU and does it need to have mandatory elements to constitute an MoU?
Unlike a contract which has to have these elements to make it a contract, i.e offer and acceptance, consideration, intention to create legal relations, capacity; in an MoU, there are no formalities and parties are free to draft a document framing their understanding of their future business project.
The main aim of an effective MoU is to avoid potential misunderstandings and disputes by agreeing on the duties and responsibilities of all parties to the agreement. Although every MoU will be unique, however, the following elements are generally important enough to be included in it:
The intent of the parties
It will define the true intent, purpose and scope, without leaving any grey area to make assumptions later on.
Parties to the Agreement
All who are involved will be specified.
The exact time period will be specified, both the start and the ending date.
Duties and responsibilities
This is perhaps the most important part of an MoU as it drafts out the roles, responsibilities and duties of the parties involved and is usually the lengthiest section in it.
It is prudent to always include what is outside the ambit of the MoU, what is excluded, what is not guaranteed and what the project is not going to abide by.
All details regarding payments or any other financial matters should be clearly specified.
Allocate Risks and Resolving Disputes
Another section of paramount importance is the risk-sharing clause. It must be made clear who will take responsibility if things go wrong? What if there is injury or death, or a loss of profit?
It must be put in writing what procedure to follow in case of a conflict or dispute arising in the course of the project which impacts the main project.
This entails the circumstances in which either or both of the parties will be able to terminate the agreement.
Generally, an MoU is not a legally binding document, but is it really completely unenforceable at law- always?
When signing an MoU, you want to enter into an agreement where your goals are clarified for that commercial partnership. However, if you do not want to be legally bound you must make sure to include a clause explicitly stating that you do not intend to be legally bound by the terms of the MoU.
You could do so by including disclaimers and phrases such as “This memorandum is not intended to and does not create any legal contractual rights between the parties.” We can say it has a moral force but does not create legal relations.
In Private enterprise
In business, even though usually an MoU is the first step towards the development of a formal contract at a later stage, it is typically taken as a legally non-binding agreement between two parties, that outlines terms and details of a mutual understanding, noting each party’s requirements and responsibilities. It does not establish a formal, legally enforceable contract by itself.
In public International law
Even in international situations, MOUs aren’t binding. They are considered a kind of “soft” law, which means they are less stringent than the traditional “hard” laws but still provide evidence of both parties’ intent to abide by the agreement. MoUs provide an appealing way for countries to cooperate in place of treaties, which are binding and can result in serious international consequences when breached. In international relations, MoUs fall under the broad category of treaties and should be registered in the United Nations Treaty Collection.
The title of MoU does not necessarily dictate whether it shall be treated as binding or not under International law. To determine whether a particular MoU is meant to be a legally binding document (i.e., a treaty), the parties’ intent, as well as the signatories’ position (e.g., Minister of Foreign Affairs vs. Minister of Environment), shall be carefully considered. And, of course, the wordings of the terms will also be carefully looked at to determine the true intent of the parties. The light was thrown by The International Court of Justice into the determination of the legal standing of a document in the landmark case of Qatar v. Bahrain, 1 July 1994.file:///Qatar v. Bahrain/ the concept of „treaty“ in international law.
Disadvantages of MOU
Donald Trump clashes with his own trade chief in front of Chinese delegation (Guardian News, 24 Feb 2019). US President Donald Trump argued with his US trade chief showing his disdain over MoUs during a televised trade meeting. Robert Lighthizer had tried to explain that an ‘MOU is a contract … a binding agreement between two people’. To which an irked Trump had replied, ‘I disagree.’ Lighthizer finally gave in, adding, ’from now on we’re not using the word Memorandum of Understanding anymore. We’re going to use the term trade agreement, all right?’
Regardless of how cautious the authors might be, MOUs pose risks. In commercial arrangements where you would want assurances, these informal agreements lack the formalities and standardizations of a contract that would protect both parties during the project. As a result, legal remedies might be difficult to invoke in the event of non-performance or a lack of adherence to the MoU.
Whether you are bound by the MoU or not will depend upon a consideration of the above factors and the actual terms of the MoU. In particular, the language used in the MoU which depicts the intent of the parties will be taken into consideration the most. It is also possible that some parts of the MoU are upheld to be binding while other parts are not binding.
Therefore, in order to avoid disputes if things go wrong, it is always better to clarify from the start and establish about what kind of relationship is intended between the parties and to have this carefully worded to leave out any doubt as to the true intention of the parties. In addition, it is important to be clear on whether or not the arrangement is legally binding, or what part is binding and what is not binding.
The blind spot appears when you think that what you have entered into is not binding (and therefore you have not negotiated or pushed as hard) but end up realising that it was legally binding. I have come across situations in the past where a party makes an agreement by ‘masking’ it as a memorandum of understanding which later turned out to be actually legally binding.
Therefore, if you are ever in doubt, it is always a good idea to seek professional advice before signing or agreeing to anything.
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