Memorandum of Understanding (MOU): Does Your Business Need One?
What is a Memorandum of Understanding (MOU)?
A Memorandum of Understanding (MOU) is a document that records the general understanding and preliminary plans between parties, prior to entering into a formal contract.
An MOU is also commonly known as a:
- Letter of Intent;
- Letter of Understanding;
- Heads of Agreement;
- Memorandum of Agreement; or
- Term Sheet
When is an MOU Used?
An MOU is typically used at the early stage of negotiations for an intended business transaction between parties.
At this point, parties usually have yet to agree on all the important terms of their transaction, but still wish to set out its broad framework.
What is an MOU Used For?
An MOU may be used to:
- Show the parties’ serious intentions in negotiations to reach a common goal and eventually enter into a contract;
- Ensure that parties are on the same page with regard to certain essential terms;
- Provide assurance to parties by discussing all the key points of the eventual contract;
- Construct a structured framework including the scope and extent of future negotiations;
- Keep all relevant persons updated with the progress of negotiations by recording any negotiations milestones, points discussed and decisions made;
- Make a public announcement that parties are in negotiations and have plans to enter into a contract; and/or
- Provide proof of the future business transaction to any potential investors.
What Happens After the MOU is Signed?
After an MOU is signed and if the parties involved are still committed to undertaking the deal, they typically wait for a formal and final contract to be drafted.
However, if the deal falls through and one party backs out, the question of whether the party is legally bound by the MOU arises.
Is an MOU Legally Binding?
Generally, MOUs are non-binding because they are often incomplete agreements that are subject to a written contract. This incompleteness often indicates parties’ intention not to create legally binding relations until the enforcement of a formal contract or agreement.
However, the court may also interpret an MOU as a binding contract and therefore a legally binding document, depending on the facts at hand.
The Singapore High Court in Bassatne Mohamed v Rifaat El Gohary has held that an MOU was a legally binding contract. The court was not restricted by the document’s label (that an MOU is non-binding), but instead examined the document’s language and surrounding evidence to determine its legal effect.
The court considered the following key factors in its decision:
The MOU’s language and contents
The language of the MOU and details spelt out showed that the parties intended for it to be a binding contract. The MOU contained very specific details, including the price of shares.
The fact that the MOU envisioned signing of an additional agreement later on did not make it any less binding.
Performance of the MOU
The parties performed obligations that were provided in the MOU such as keeping each other posted on all trades conducted and consulting a law firm regarding the drafting of the subsequent agreement.
Party A was also employed by the Party B’s company according to the MOU, and acted as the company’s paid executive director despite not being formally appointed as such.
This showed the parties’ intention for the MOU to be legally binding.
Parties’ subsequent conduct
To determine if the parties’ subsequent conduct proves for the MOU to be legally binding, the court looked at whether the parties had acted on an assumed state of facts or law.
In this case, the parties acted on the basis that the MOU was operative and in accordance with its terms, thus showing intention for the MOU to be legally binding.
Therefore, although parties may enter into an MOU to nullify any intention to be legally bound by a contract, the court may disregard the document’s label as an MOU to determine its exact nature.
What are Some of the Clauses that MOUs should Contain and Their Objectives?
MOUs generally contain, but are not limited to, the following essential terms:
1. Details of parties
This is important to identify the parties undertaking the MOU. Some details include parties’:
- Full names;
- Identification numbers;
- Contact numbers; and
- Registered addresses.
If companies are involved, some details to be included are:
- Companies’ registration numbers;
- Contact numbers; and
- Registered addresses.
2. Purpose of the MOU to take legal effect or otherwise
Setting out the purpose of the MOU is essential to record the goals of negotiations and ensure that all relevant persons are on the same page. From the outset, parties should clearly state the intended legal effect of the MOU.
If parties do not intend for the MOU to be legally binding, it should be explicitly stated that:
- The contents of the MOU is subject to a formal and final contract; and
- Parties would not have any outstanding obligations to each other for failure to agree on a formal and final contract.
3. Responsibilities of parties
Since an MOU is meant to set out the general framework of the initial phases of negotiations, it should contain the scope of work of parties.
For example, frequency and timing of meetings for negotiations, and any other responsibilities specific to the transaction.
4. Essential details of the transaction
Useful terms to be included are the general overview of the transaction, and other key points. For example, industries, prices, any third-parties involved, and deadlines to be met.
5. Duration and termination of the MOU
The MOU should contain the beginning and end dates of the MOU, and how the MOU may be terminated should the need arises i.e. notice period and mode of termination.
In the event that negotiations fail, parties should include confidentiality, non-disclosure and good faith clauses in the MOU, to protect themselves in case either parties have the intention to act dishonestly. For example, disclosing the other party’s information.
7. Signatures with dates
Finally, once the MOU is agreed upon, it should be signed and dated by the parties or any authorised representatives of the companies involved.
Once signed and dated as such, the MOU will then take effect.
Since it is uncertain when a court may interpret an MOU to be legally binding, it is important to exercise care and caution in drafting an MOU.
If parties did not intend for the MOU to be legally binding, problems may arise when parties did not explicitly state so in the MOU, which may lead the court to interpret the MOU as a legally binding contract instead.
Therefore, especially in complex commercial transactions, you may want to seek advice from a corporate lawyer when you need to draft an MOU.
- Social Enterprise and B Corp: Are They Any Different?
- Startup Incubator or Accelerator: Why & How to Join in Singapore
- Guide to Finding Investors For Your Singapore Start-Up
- How to Get a UEN Number in Singapore: Step-by-Step Guide
- 8 Checks to Conduct on Registered Companies in Singapore
- Artificial Intelligence in Business: Legal & Ethical Considerations
- High-Tech Farming Business in Singapore: How to Get Started
- How to Start a Business With a Co-Founder in Singapore
- How to Start Your Own Law Firm in Singapore
- Starting a Telemedicine Practice: Legal Considerations
- Developing a Business App? Here are 5 Things to Note
- Event Planning Business in Singapore: How to Handle Licensing, Etc.
- A Guide to Starting a Business in Singapore
- Registering a Business in Singapore: Do I Need to and How?
- Deciding Your Business Structure: A Sole Proprietorship, Partnership or a Company?
- How to Choose an ACRA-Approved Name for Your Business
- 7 Start-Up Government Grants in Singapore (and How to Apply)
- How to Open a Corporate Bank Account in Singapore (2024)
- Guide to Corporate Secretarial Services & Hiring a Suitable Firm
- Financial Year End (FYE) Singapore: How to Decide/Change
- 8 Tips on Choosing the Best Virtual Office in Singapore for Your Business
- Company Seals vs Rubber Stamps in Singapore: When to Use What
- Multinational Company (MNC): How to Set Up One in Singapore
- How to Set Up a Holding Company in Singapore (With FAQs)
- How to Register a Company in Singapore: Documents, Fees, Etc.
- Guide to Limited Liability Companies in Singapore
- Starting an Exempt Private Company in Singapore: Benefits and Process
- Registration and Compliance Fees for Singapore Companies
- Setting Up a Company Limited by Guarantee in Singapore
- Why and How to Set Up a Subsidiary in Singapore (with FAQs)
- Why and How to Set Up a Branch Office in Singapore (with FAQs)
- Offshore Company: What is It & How to Set Up One in Singapore
- Trading Company in Singapore: Why and How to Set Up One
- Shelf Company: What It Is and How to Buy One in Singapore
- Special Purpose Vehicle: Does Your Start-Up Need One?
- Registering a Society in Singapore
- When Should a Small Business Change Its Legal Structure?
- Sole Proprietorship vs Pte Ltd: Pros and Cons in Singapore
- Forming a Sole Proprietorship in Singapore
- Forming a Partnership in Singapore
- Guide to Registering a Limited Liability Partnership (LLP) in Singapore
- Why and How to Convert Your Singapore Sole Proprietorship into a Pte Ltd Company
- Singapore GST Registration Guide for Foreign Businesses
- Applying for Tech.Pass in Singapore: Eligibility and Benefits
- How Can Foreigners Start a Business in Singapore?
- Foreign Companies Setting up in Singapore
- Singapore Representative Office: How Can a Foreign Company Set Up?
- Redomiciliation: Why and How to Convert Your Foreign Company into a Singapore-Registered Company
- Singapore Entrepreneur Pass: Who Is It For? How Do I Obtain One?
- Setting Up a Company in Malaysia: A Foreigner’s Guide
- Do You Need a Licence to Sell Home Bakes in Singapore?
- Legal Checklist for Setting Up a Restaurant in Singapore
- How Businesses Can Import Food into Singapore
- How to Apply for Halal Certification for Your Singapore Restaurant
- How to Apply for a Liquor Licence to Sell Alcohol in Singapore
- Public Entertainment Licence: Guide for Business Owners
- Want to Busk in Singapore? Here's How to Get Your Busking Licence
- Guide to Writing Website Terms and Conditions in Singapore
- Using Smart Contracts in Singapore: Benefits and Risks
- Your Guide to Joint Venture Agreements in Singapore
- Key Legal Documents Every Startup Should Consider
- Legal Pitfalls of Using Generative AI to Draft Business Documents
- Do You Need a Partnership Agreement When Setting Up?
- Do You Need a Shareholder Agreement When Setting Up?
- Memorandum of Understanding (MOU): Does Your Business Need One?
- Guide to VIMA in Singapore (Venture Capital Investment Model Agreements)