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Handshake deals: when do you need a memorandum of understanding?

Gemma Nugent

So when DO you need a memorandum of understanding?

Let’s set the scene: Your business development manager has identified a white-hot opportunity that ticks every strategic box for your business. Your project team lacks depth in one particular scope area, but that isn’t a big obstacle since you’ve already opened discussions with a potential partner with complementary strengths.

Time passes and the opportunity is looking really positive. You and your commercial partner decide to jointly pursue it. However, you’re nervous – you haven’t worked with this partner before and you’re anxious about whether their approach to strategic pursuits is as rigours as yours. They’re happy to do the deal on a handshake. But not you. You want to lay down some broad guidelines before you get your hands dirty.

You call me up and ask me to draft a Memorandum of Understanding (an “MOU”). But before we start, there’s one thing you really want to know. You want to be able to hold your teammate to a few key points, especially exclusivity and confidentiality. After all, you were the one who found the opportunity and you want to make sure you have the best crack at it. So, your question is this: “Gemma… Is an MOU a “real contract”?”

It’s always going to depend on circumstances. But, as a general rule, MOUs are not legally binding. That means there are a few factors that you should consider before deciding whether an MOU is the best path forward.

What terms would you include in an MOU?

An MOU will typically cover a few basic expectations to anchor the teaming arrangement:

  • exclusivity;
  • confidentiality;
  • mutual exclusions of liability and consequential loss;
  • both parties will bear their own costs in relation to the pursuit, or possibly share the costs equally;
  • ownership of IP might be retained by the developing party or shared if both parties will contribute to the IP right;
  • the scope of each party’s contributions to the pursuit and any relevant timeframes by which those services should be completed;
  • processes to resolve disputes between team members.

Let’s stick together

The most important of these terms is often exclusivity. You and your new business friend are going to hop into a strategic hot tub and show each other some valuable commercial secrets. Plus, pursuing opportunities and preparing bids is an expensive, time consuming exercise, so everyone wants to be confident that they have backed the winning team. The lead tenderer in particular does not want to think that its team is quietly backing another horse and making it harder to win the race.

Will it stand up in Court?

MOUs have their place, particularly as a relationship building tool, but generally it is questionable whether they are a legally binding contract. Clients always seem really surprised when I say this. But if no money and services change hands between the parties then the MOU lacks one of the key ingredients of an enforceable contract: valuable consideration. This means that a court cannot force the parties to perform promises made in the MOU.

If it walks like a duck…

Sometimes some money will change hands under an MOU, perhaps to cover the basic costs of working on the tender, and in this case the MOU may actually be an enforceable contract. The parties should be careful here too if they don’t intend to enter a legally binding agreement. This might be the case if they don’t yet know all the nitty gritty of the final deal and expect to nut out a detailed contract later.

Even if the document is described as an MOU and clearly states that a formal agreement will be negotiated later, if the parties come to blows about it, the court will look at their conduct and the terms of the documentation to determine whether or not it is enforceable, rather than the words used.  

Should you be keeping your powder dry?

Another thing that troubles me about MOUs is the time taken to negotiate them. Sometimes there is considerable wrangling about exclusivity and liability and other terms. Frequently I feel like this time would be better spent negotiating the terms of a binding legal contract.

This is particularly the case where a design partner is required to put some preliminary or conceptual designs on the table, and a contractor partner wants to rely on them to start developing costs. In those situations, I recommend that the parties consider just moving straight on to the main event (for example, a design services agreement). It can contain an early contractor involvement or tender phase that provides for the situation where the contractor does not win the project and the agreement comes to a natural end after the initial phase services are complete. That said, in this scenario, the design partner should be careful to exclude any liability for reliance on preliminary or conceptual designs.

So should we or shouldn’t we?

It really depends on two key things, that you should articulate first:

  • your commercial objectives (both alone and in partnership); and
  • your expectations for the commercial relationship.

If the parties’ capabilities strongly complement one another and their sum is greater than their parts, then agreeing a framework for mutual goals and expectations may really strengthen the bond between them and open up a range of opportunities that might otherwise have been inaccessible.

Thinking about hopping into bed with a partner and want to lay down some guidelines for how you’ll work together?

Give me a call. I would be delighted to help you workshop your business objectives. Once those are settled, I can help you prepare a clear, plain English document that will support the achievement of your commercial and relationship goals.  

Photo of Gemma Nugent

About Gemma

I help construction, engineering and consulting businesses create and negotiate clear contracts so they can achieve great project outcomes. I founded SoundLegal to help SMEs in the engineering, construction, consulting and light industrial sectors manage their risk to support business growth, by finding practical, common sense solutions to contractual and other legal challenges. Subscribe to the SoundLegal newsletter “No Jargon” to hear monthly business insights from me.

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