Description
This is drawn up at a time when the parties are at a planning stage and where they may or may not wish to commit to one another loosely before final details are agreed upon in a contract. It outlines the mutual understanding of the negotiators about their intention for the subsequent agreement without finally binding them into an irreversible relationship. If the parties wish to avoid all chance of a loose binding agreement being created, all correspondence should include the sentence saying:
“This Memorandum of Understanding (MOU) is subject to a final contract signed by both parties and it has no binding effect”.
If the MOU does create contractual obligations then depending on the wording of the MOU, two possibilities arise:
a) The MOU will be supplemented by additional terms once agreed upon, or b) The MOU will be substituted by new terms once agreed upon.
The danger of a MOU is that it could be construed as an innominate contract if the court detects consensus between the parties. A clumsily worded letter embodying certain terms could be construed by the court as a commercial document with a clear intention that it should have commercial operation. The court will not lightly render an understanding ineffective.
Instances of use of a MOU are as a prelude to a shareholders’ agreement or to purchase a business.