Enhancing legal certainty: Understanding the limitations of Memorandum of Understanding (MOU) as a legal instrument
06 May 2024
Contracts are crucial in the world of business and governance as they define relationships and responsibilities. Among these, the Memorandum of Understanding (“MOU”) often serves as a preliminary document that outlines the terms and conditions of a potential agreement between parties. However, despite its widespread use, the MOU has certain limitations and drawbacks that make it less than ideal as a legal agreement.
Lack of legal enforceability
One of the biggest limitations of the MOU is that it has limited legal enforceability. Unlike formal contracts, which are legally binding and can be enforced in a court of law, MOUs often require more elements to be considered legally binding. While they may outline the intentions and expectations of the parties involved, MOUs typically lack the essential components, such as consideration and intention to create legal relations, that are required to form a legally binding contract. As a result, parties may find themselves without any legal recourse in the event of a breach or disagreement.
Ambiguity and uncertainty
MOUs have a tendency to be vague and ambiguous, which is different from contracts that are meticulously drafted to define rights, obligations, and remedies in clear and precise terms. MOUs often lack explicit language and specific provisions, which can lead to interpretation and misunderstanding. This can result in parties finding themselves at odds over the agreement’s interpretation, leading to disputes and conflicts in the future. The lack of clarity in MOUs can make it challenging to hold parties accountable for their actions, further undermining their effectiveness as legal instruments.
Reliance solely on MOUs for legal protection can leave parties vulnerable to unforeseen risks and liabilities, potentially leading to costly litigation and protracted legal battles.
While the Memoranda of Understanding may serve a useful purpose as preliminary documents outlining the terms of a potential agreement, they need to be revised as legal instruments. From their lack of legal enforceability and ambiguity to their limited legal protection and potential for misuse, MOUs fall short of providing the comprehensive framework necessary for ensuring airtight legal agreements. As such, parties would be wise to exercise caution when relying on MOUs and instead opt for formal contracts to safeguard their interests and mitigate risks effectively.
A more effective approach
There is a more legally effective, efficient and cost-effective alternative to the MOU approach.
This approach entails having the contracting parties meet online or in person with a legal consultant to work jointly through the key commercial and legal terms of the contract itself. The legal consultant is able to explain the legal terms of the contract to the parties in real-time and facilitate the discussion between the parties on the commercial terms. The legal consultant then captures what is agreed between the parties in the meeting and submits this the attorney drafting the contract.
There are several advantages to this approach.
Increased legal effectiveness
By following the proposed approach the shortcomings of the MOU approach are avoided as the parties move directly to negotiating the terms of the contract and drafting the contract itself.
Reduced conflict
With the proposed approach the parties get aligned strategically right at the outset of the contract drafting process, which reduces the potential for conflict to arise during the drafting process.
Reduced time to contract finalisation and signature
By circumventing the drafting of an MOU a superfluous step is removed from the end-to-end process from the time the parties start to negotiate to the time that they have a signed contract.
Reduced legal costs
While there is a cost to using a legal consultant to expedite and streamline the process, the cost is far less than it would be with the protracted process that ensues in the normal contract drafting process. In the ordinary contract drafting process the contract is circulated between each party and their respective attorneys for drafting and reviewing of the various drafts of the contract over a period of (often) several weeks or even months.
Reduced stress and frustration for the contracting parties
First time contracting parties are often unaware that various drafts of the contract are produced and reviewed by all the parties before a final version of the contract is obtained for the parties to sign.
Beside the cost-saving opportunity, the streamlined contracting process removes a lot of the headache and frustration of the normal protracted contracting process for the parties by removing the step of drafting the MOU and significantly increasing the efficiency of the negotiating and drafting processes.
To inquire about legal consulting services to expedite and streamline your contract drafting process, please contact Nicolene Schoeman-Louw or Julia Stewart.
Article sourced from SchoemanLaw Inc.
See also:
- Memorandum of Understanding “MOU” – Is it binding?
- Memorandum of incorporation versus a shareholders agreement – Some important considerations
- Drafting Memorandum of Incorporation (MOI) share structures – Important considerations
- Recent lessons in determining fair value – Share valuation can be a contentious issue, especially if the valuation is left to the courts
