Memorandums of Understanding – Statement of Intent or Binding Contract?

The recent finding in Sundorne Products (Llanidloes) Ltd v Geminor UK Ltd [2024] EWHC 1666 (Ch)  presents the latest development in the ongoing debate surrounding the efficacy of Memorandums of Understanding (MoUs). Typically a tool used by parties seeking to document their goals and intentions for future dealings, the use of MoUs can signify different things: (i) parties may be undertaking simple, non-contractual discussions to ensure that they are on the same page before entering into a formal agreement; (ii) parties may expect to be bound by and commit to performance based on an MoU; or (iii) commercial terms may be intended as indicative only whilst confidentiality provisions and other salient clauses may be considered binding. The risk that the parties' intentions for (and understanding of) an MoU document may not fully align, coupled with the courts' ability to imply a contractual agreement (whether this mirrors the exact intention of the parties or otherwise), result in an inherent uncertainty and subjectivity underpinning the function of MoUs.

How can parties avoid this uncertainty?

If parties do not intend to be bound by an MoU, this should be expressly stated within the MoU, save for certain limited aspects such as confidentiality, if appropriate. Any formal contract subsequently entered into will supersede the MoU, and it can be helpful to mark the MoU as non-binding in the event that the parties subsequently decide to change any aspect of the deal when negotiating and finalising the full form contract. Similarly, if either party is operating on the assumption that an MoU will create a formalised legal relationship, it is best to make this evidently clear from the wording of the MoU itself, as well as in documented pre-contractual negotiations. If this is the intention, the parties should take care to ensure that the contractual terms are sufficiently certain and the requisite consideration has been exchanged. It is also a sensible precaution to include relevant terms which will support the development of the subsequent contract and provide some protection should the parties encounter difficulties down the road – this could include termination provisions by a certain date or on the occurrence of a specified event, as well as an enforceable dispute resolution procedure.

In any event, contracting parties should be keenly aware that rushed-through negotiations captured within an MoU to facilitate forward momentum on a project may result in the kind of binding contractual ramifications that would otherwise be reserved for a (potentially heavily scrutinised and negotiated) formal contract. Whether the parties have agreed that an MoU is binding or otherwise, finalised contracts should always, as a last line of defence, assert in unequivocal terms that the arrangement constitutes the entire and exhaustive agreement being entered into, thereby removing the risk that a court retroactively interprets the intentions of the parties at the MoU stage when determining future contractual disputes.

Why might the court determine that an MoU constitutes a valid contract?

Sundorne Products required the court to consider whether an MoU entered into between two parties in advance of a formal joint venture agreement constituted a binding and enforceable contract.

In this instance, the court determined that the MoU, coupled with an offer letter and a letter of support issued by one party to the other created a contract, with the parties thereafter demonstrating valid acceptance by conduct in tendering a joint bid. The court also considered contextual elements; Geminor had a business need to be included in the tender arrangement, and the parties neglected to enter into subsequent negotiations as to price. It was further determined that the intention of the parties to enter into a consortium agreement at a future date did not negate the finding that the parties had entered into a valid and binding contract.

Key Takeaways when entering into MoUs

• Make sure that the parties' intentions for the MoU are clear and mirror one another.
  
• Prepare the MoU on this basis – ensure that the document unequivocally sets out all of the required terms if the parties will be relying on the MoU, or otherwise confirms that the document is not intended to be binding.
  
• Do not commence performance of duties until a formal contract has been finalised, or the parties are satisfied that the MoU is to take effect as a binding contract and caters for the necessary formalities (e.g., default, termination, costs and disputes).
  
• Ensure that any finalised contract states that it is the entire and exhaustive agreement entered into by the parties, to avoid retroactive effect being given to the MoU by the courts.