Contrary to the common perception that the memorandum of understanding (MOU) document is usually associated with international relations, it is a common device in business negotiations as well. On the scale of formal agreements, a MOU is much less formal than a contract – but it is more official than a gentleman’s handshake.
If you are planning to purchase a company or enter into a joint venture with another party, it is important to demarcate the details of the intended relationship and transaction before the details of the agreement can be finalised. The establishment of a new business, be it in partnership or by acquiring a business, or a share thereof, will involve complex arrangements, so it is important to establish the critical factors of your understanding regarding your intended transaction.
A Memorandum of Understanding outlines and describes the purpose of the intended agreement between two or more parties and conveys the expectations that will be mutually accepted by all the parties involved in the negotiation process. The existence of a MOU is usually an indicator that a binding contract is soon to follow.
The MOU may contain all the salient terms of the agreement and may be signed by all parties involved but does not as such constitute a binding agreement.
Two court cases are regularly cited to show that MOU’s cannot be legally binding. In Southernport Developments (Pty) Ltd v Transnet Limited [2004] JOL 13030 (SCA)[2] the court said that a MOU did not constitute an agreement between the parties but that it merely conferred an obligation on the parties to conduct negotiations in good faith.
And, in Premier of the Free State Provincial Government and Others v Firechem Free State (Pty) Ltd [1] it was stated in judgment that, “An agreement that parties would negotiate to conclude another agreement is not enforceable, because the absolute discretion vested in the parties to agree or disagree.”
If MOUs are not a prerequisite to entering into agreements and are non-binding, then why should parties consider using them in the first place?
A memorandum of understanding establishes the parties’ mutual intention and clearly states their objectives and goals. It will reduce uncertainty by making the objectives and expectations of all parties very clear and prevent potential future disputes. The memorandum of understanding document outlines terms and objectives, so that your attorneys can easily use the document as a foundation for a binding contract in the future. Once a MOU is finalised, it creates a clear record of the terms to be considered in the negotiations.
It is important to consult with an experienced commercial attorney before entering into any agreements, including an MOU.
Koos Benadie is a Director at Barnard Incorporated in Centurion
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