Why start with non-binding arrangements?

Whatever you name your non-binding arrangements, Memorandum of Understanding, Letter of Intent, or Heads of Agreement they can be a useful tool in the following circumstances:

• To document a high-level understanding of a future intention or the preliminary actions of the parties (such as carrying out due diligence) as a precursor to a formal contractual arrangement
• To record vision, common goals, governance, expectations, sharing of information, roles and responsibilities around a collaborative effort that will never be committed to a formal agreement
• To document arrangements between government agencies that cannot legally contract with each other because they are part of the one legal entity being the relevant body politic
• To facilitate one or more of the parties to obtain funding or finance from third parties
• to give the parties a basis upon which to apply for licensing or comply with other regulatory processes relevant to a proposed project or undertaking
• as a tool to express intent to carry out a non-commercial collaborative project or undertaking that needs room to develop over time.

Is it legally binding?

While MOU’s are not usually intended to create legal relations, they can unintentionally create a legally binding contract.

Applying the “duck test” can be useful – “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” No matter what the document is called, courts will consider the objective intent of the parties by looking at the substance of the document.

If the document contains contract-like terms, has all the required legal elements of a contract, and uses contractual language, then it probably is a contract.

An MOU is like an engagement ring – it is an expression of mutual intent, but if the wedding plans don’t work out, the most you want to have to do is give back the ring, not be forced to hold the wedding!

How do I avoid accidentally getting married?

Firstly, include in your MOU an express statement that “this document is not intended by the parties to be legally binding”, but note, this statement is by no means foolproof. In fact, even going further and stating that the document is “subject to and conditional upon formal contracts being entered into” has been held by Australian Courts not to be enough by itself to ensure the parties haven’t entered into a legal relationship. Be especially wary of unintentionally contracting by exchange of email which may be held to be binding notwithstanding the “informal” nature of an email exchange. Correspondence by way of exchange of SMS should also be avoided.

In the document, avoid mandatory language such as ‘agree’, ‘must’ and ‘shall’. Instead use language such as ‘commit to’, ‘will work together to’ ‘will be responsible for’ or ‘will endeavour to’ and ‘intend to’.

Do not include clauses that would usually be considered, or are, legally binding, such as confidentiality obligations, intellectual property rights, releases or indemnities, or boilerplate legal clauses like ‘severability’, ‘governing jurisdiction’, ‘waiver’ etc, unless the document has been specifically drafted as a hybrid and it has been made very clear that certain clauses are, and certain clauses are not, binding on the parties.

Execute the document informally.

What if it needs some legally binding content?

Generally speaking, an MOU is not suitable where commercial terms or legally binding obligations are required, such as price and payment terms, confidentiality or privacy obligations, intellectual property rights, exclusions or limitations of liability, or releases and indemnities.

While it is possible for a document to be a “hybrid” of binding and non-binding terms, (for example where the parties need to maintain confidential/deal with upfront use of existing IP during the due diligence stage, and the like), it is better if binding confidentiality and any other other legal clauses that are needed up front are put into a separate document.

Hybrids of binding and non-binding obligations carry increased risk and should be drafted/advised on by a lawyer.

Reasons to start with a MOU

Good reasons to enter into MOU type arrangements rather than jumping straight to formal documents are:

• Turnover of staff and/or cast of thousands involved in the negotiation of an undertaking might mean the deal never gets done if the parties don’t sign a MOU - for business deals it introduces a structured timeline for a due diligence period and clarifies early obligations of each party, and for government it facilitates momentum in settling the boundaries of what the parties want to achieve.
  
  
• Once the MOU is signed it can limit the flexibility of the parties to change the substance of the commercial terms of the deal, making the next stage more straightforward
  
  
• It can provide an efficient set of “instructions” for lawyers drafting and negotiating the formal contract.

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Important Note: This information is general and is not intended to be a substitute for specific legal advice in relation to your particular deal or arrangement.