Memorandum of Understanding
A memorandum of understanding (MOU), also known as a “letter of intent” or a “term sheet”, is an agreement between two or more parties expressing their desire to do business together. It is legally non-binding, expresseing the intent of the parties to enter into a formal, binding agreement in the future.
Our law office specializes in company law in Israel. In this article, attorney Michael Decker will explain the purpose and limitations of a Memorandum of Understanding.
The purpose of an MOU
As an MOU demonstrates the scope and intent of the parties’ business dealings, it serves as the basis for negotiations towards a formal contract. While not binding, an MOU is a serious agreement of intent and shows that the entering of a formal contract may be imminent.
As MOU’s can be produced relatively quickly and without much public fanfare, these are often found in international negotiations, such as those involving NGOs, government organizations and large international business dealings. Much time and effort goes into their preparation and they demonstrate a serious intent on behalf of the parties to sign a formal contract.
Their significance is not always appreciated, however. For example, during bi-national trade talks between China and the United States in April 2019 involving a representative of China, President Donald Trump was quoted as saying, “I don’t like MOUs because they don’t mean anything”.
What’s the difference between a contract and an MOU?
It should be noted that the title of the agreement is not determinative of its enforceability, whether it be called an MOU or a contract. The former can often be the starting point of negotiations, in which each party would draw up an MOU reflecting its optimal terms, the intent of the parties to cooperate and the expectations and obligations of each, as well as terms that are considered non-negotiable.
The intent is what counts and this is what separates a legally enforceable contract from an MOU. Generally speaking, a contract involves one party offering or promising to do or refrain from doing something for another party in exchange for something of value. “I promise to paint the interior of your house in exchange for $1,000 dollars payment” would be an example. Broadly speaking, an MOU expresses the scope and intents of the parties and their desire that it serve as the basis for entering into a formal, binding contract representative of its terms.
Can a memorandum of understanding be enforced?
A key feature of a binding contract is its enforceability by the courts in the event of its breach. In rarer cases the courts would insist that the breaching party perform its obligation. Ordinarily, it would accord damages to the injured party that suffers the breach.
Unlike legally binding contracts, an MOU is not required to contain legally binding language. An MOU may consist of a policy statement stating that the parties intend to support and promote a mutually beneficial action. An MOU may outline the terms of an agreement, but state that it shall become enforceable only upon the parties entering such agreement. An MOU would also be useful for two or more inter-office parties of a single public entity, such as a contract between a municipality and a school district. In such a case, a legally enforceable contract would not be appropriate for defining the parties’ expectations and obligations.
The key feature of an MOU turns on thed intent of the parties not to be legally bound by its terms and it is important that the parties not blur the line separating an MOU from a legally binding contract. Their intent is the salient feature.
Contact an Israeli contract law expert
If you need helping drafting or reviewing a contract or Letter of Intent, we are ready to help. Schedule a meeting at our offices in Tel Aviv or Jerusalem:
:
:מאמרים מומלצים