By Keith Witek and Brian Spross
When MOUs and LOIs are used
In the olden days, letters of intent (LOIs), memorandums of understanding (MOUs), agreements to agree, memorandums of agreement, and similar documents were used very sparingly. Often these documents, were only used for very large or very complex deals as a way to vet the deal before a lot of money was spent on trying to make the details work. Today, MOUs are being used to frame many different types of deals, even routine deals, before beginning work on the formal contract. These days, there is temptation to use MOUs in a lot of places where they are not appropriate.
Improper Use of MOUs
· The Frustration MOU. Sometimes you talk about a deal for a long time and seem to get nowhere with the other parties. The urge is to reduce something to writing so it feels like you are moving forward. Enter the MOU. All this tends to do is memorialize disagreements. That is not good.
· The MOU Contract. Full blown deals are expensive, time consuming, and painful at times. Sometimes you may feel, why bother? Use an MOU as the deal. If you do, too many terms are completely missing or too vague. Misunderstanding and false expectations can reign. In the end, if it is the only “deal” you have, a court will fill in the blank with rules you won’t like, after you pay your litigation attorneys handsomely. Also, most terms of MOUs call themselves “nonbinding”.
· The Deception Contract. Some people know that MOUs can be binding, sometimes with boilerplate state and federal law terms that are bad for the other guy. These people can create an MOU that looks harmless, but is a very bad deal for you.
· The Bait and Switch MOU. Sometimes people who know MOU law will try to pull the opposite of the Deception Contract. They word an MOU that looks binding but is really non-binding. You rely on the deal, invest and staff people, and then find out the MOU means nothing.
· The Press Release MOU. Sometimes you want to make a splash in the press, and to do so, you need something quick. Enter the MOU. The MOU-based announcement may fall apart three weeks later. However, you made it public, and investors may have relied on it. Oops.
The Proper Use of MOUs
· The Bridge MOU. Sometimes your deals are complex, they require the attention of limited resources, forward progress is too slow to get things nailed down, they cost money, etc. Before you invest serious in “the deal”, you want to have some idea that both sides are really seeing things eye-to-eye. A MOU can ensure that all parties are on the same page with respect to main details, so everyone is comfortable going forward.
Proper Structure and Intent of an MOU
There is one MOU structure that is most often the best approach. It is called a semi-binding MOU.
Think about this. If an MOU is not binding at all, what is the point of that time investment? Further, MOUs that you think are non-binding can become binding by the other party’s reliance/performance on the MOU, oral discussions, emails, etc. A fully binding MOU makes no sense either. As already mentioned, MOUs are not “low carb contracts” because they miss key terms and are too vague, yet a court will fill in the blank, often with both parties unhappy.
A semi-binding MOU has a non-binding section that spells out technical and business terms that the parties do NOT have to act on, but MUST negotiate over in good faith. If you say, we will consider X, you have to consider X, not Y. If you fairly consider X and it doesn’t work, no harm no foul. This section scopes the negotiation space for both parties, the deal lies in that box, now go find the deal. The binding section is binding on the party and handles legal issues like confidentiality, what state or national law applies, damage limitations, when negotiation can terminate, etc.
When is an MOU Binding versus non-Binding
Many think an MOU is binding solely on if you say it is binding or not. This is not accurate. MOUs are often found binding or not binding based on a multi-factor balancing test. Factors that support a non-binding MOU are weighted and set on one side and factors that support a binding MOU are weighted and placed on the other side. The heaviest side wins, and no one factor weighs a ton. Here are some common factors:
· Intent of Parties. If you say the MOU is binding or not, and use language that expressly indicates binding or not binding, that is one factor.
· Presence of Open Critical Terms. If an MOU has critical missing terms, like a sales MOU that does not specifically identify the product sold or the quantity to be sold, it is probably not binding. Courts don’t like to guess at critical terms, but they will fill in the blanks on non-critical terms, which, surprisingly, may sometimes include price…
· Definite Language vs. Tenuous Language. Using phrases like “intends to”, “may”, “will try to”, etc., is less likely to result in a binding MOU than language like “shall deliver”, “agrees to provide”, “will perform”, etc.
· Short or Long MOU Duration. A short MOU that has a short duration that is inconsistent with a long contractual relationship is less likely to be considered a binding agreement. And, a short duration can limit your risk.
· Reference to Further Negotiation or a Later Agreement. Saying that the relationship terms/specifics are subject to much more negotiation or a formal signed document means the MOU is less likely to be binding.
· Presence of Conditions Precedent. If conditions must be satisfied on which to predicate the deal, and those conditions are not happening, the deal is likely to be non-binding. Examples: “If our stock hits $50…”; “If performance comes in above X…”; “Subject to closing a pricing structure by Dec 31st…; “Provided we can hire an expert”, etc.
· Habit and Custom. If you work in an industry that often does deals by an MOU or handshake, or if you yourself have shown a business propensity to do deals on the lam, a court is more likely to find the MOU binding.
· Consideration. Did both parties give and take material, instead of just agreeing to talk further? Was money given, was technology exchanged, etc. If so, this one factor tilts the weight in favor of a binding MOU.
· Detrimental Reliance and Promissory Estoppel. Did your actions and conversations lend the other party to believe they had a deal? Don’t say things like, “Ignore the MOU, we have a deal…” Also, if the other party starts taking serious action under the MOU and you know the deal won’t happen, standing by and letting that happen is not smart.
With an understanding of these factors, attorneys and businessmen can tilt an MOU towards binding or non-binding as they see fit, for good or ill.
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