Legal Advice on Heads of Agreements, 'MOU's' and Terms Sheets

We give advice on Heads of Agreement often called Terms Sheets or a Memorandum of Understanding ('MOU'), including whether they are enforceable, disputes over terms in Heads of Agreement and drafting of Heads of Agreement.

Because our offices are not located in the CBD our rates are substantially lower, often up to 20% lower, than most commercial law firms.

Heads of Agreement, Terms Sheets, MOU's and Letters of Intent are all preliminary documents commonly used during the negotiation of commercial agreements.

While an MOU can be a good method of recording the key terms or areas of agreement between the parties, getting these terms down on paper to allow for later expansion into an agreement can be difficult.  Here are some things to consider:

What is an MOU?

An MOU is a document recording the basic terms of a proposed transaction.  The parties sign the MOU in the pre-contractual stages of negotiations with the intention of continuing negotiation and them signing a more formal contract at a later stage (often after the involvement of lawyers and accountants).  In general, an MOU can be used to provide:

  • A record of key terms agreed on to date
  • Detail of fundamental arrangements or a party's commitment for the benefit of third parties such as financiers or potential investors
  • Mechanisms dealing with pre-contractual issues such as exclusivity, confidentiality, due diligence and intellectual property
  • Some degree of comfort that a deal is possible before the parties incur further expense

Is an MOU binding?

It is important to note that some people immediately assume that an MOU is legally binding, while others immediately assume that it is not.

Whether an MOU is legally binding on the parties depends on the circumstances.  Key issues that arise when determining if an MOU is binding are:

  • Did the parties intend to be bound by the obligations set out in the MOU?
  • Is the MOU sufficiently clear and certain to be legally binding?

Did the parties intend to be bound?

To determine whether the parties intended to be bound by the obligations set out in the MOU, a court would take an objective approach to examine whether an intention of the parties to be bound can be inferred from the circumstances.  The best way to avoid uncertainty on this issue is to ensure the MOU has a clear statement as to whether or not the parties intend the document to be binding.

Is the MOU sufficiently clear and certain?

Even if the parties are clear on whether they intend for the MOU to be binding, the MOU must be sufficiently clear and certain to actually be binding in practice.

It is common in an MOU to have certain obligations expressed to be 'on the usual terms', 'at a fair price' or 'subject to contract'.  The general presumption is that obligations under an MOU are not binding on the parties if the obligations are expressed to be 'subject to contract' because the agreement between the parties is too vague to be enforceable.  This presumption arises because from an objective viewpoint, the obligations must be sufficiently clear and certain so the parties know what the obligations actually are in order for them to be enforceable.

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