Make Your MOU Matter

Mining and resources legal experts Jo Daniels and Aleisa Crepin ask ‘Is that MOU a binding IOU or not worth the paper it is written on?’

Memoranda of Understanding (MOUs) are used extensively in the mining and construction industries. They are used in a range of circumstances, including:

• when parties wish to quickly document what they think is agreed between the parties, with the intention of then further negotiating the issues and entering into a longer, more detailed agreement;
• setting out a framework for the negotiation of a complex agreement;
• detailing key terms for the benefit of third parties, such as financiers, potential customers, potential investors or a mechanism to allow the parties to announce their intentions to the general market;
• a mechanism to deal with pre-contractual issues such as confidentiality, intellectual property, due diligence and/or exclusivity; or
• where one or both of the parties are unsure of whether a deal is possible at all and an MOU provides comfort to the parties or their boards that a deal is at least possible because expending significant time and money on a negotiation or exchanging confidential information.

Often, the parties forget to express whether their intention is that the MOU is binding, or state that the intention is that the MOU is binding but then do not draft the MOU in a way which is legally enforceable.

AN MOU GONE WRONG

In the recent case of Baldwin v Icon Energy Limited (2015) QSC 12, it was found that an obligation in an MOU to negotiate a full contract in ‘good faith’ was unenforceable.

In that case, the MOU stated that the parties would work in good faith and ‘use their reasonable endeavours to negotiate by 30 August, 2008… a Gas Supply Agreement using the principles set out in Schedule 2’.

However, the MOU also stated that whilst the MOU was legally binding the Schedule 2 principles were not binding. The parties did not agree on the terms of a Gas Supply Agreement and Mr Baldwin claimed that the defendants did not negotiate as required under the agreement because, among other things, they insisted on terms which were inconsistent with the indicative terms in Schedule 2.

The court found that the MOU did not oblige the parties to actually enter into a Gas Supply Agreement but merely specified some matters that had to be included. The decision reviewed a number of cases on the enforceability of promises to negotiate. It concluded that while there were cases which found that an obligation to negotiate in good faith was enforceable, these cases occurred in the context of an existing contract, such as in a dispute resolution clause, where the existing rights and obligations of the parties were specified in detail.

This was found to be different from the circumstances of the case, where the obligation to negotiate in good faith was not occurring where the parties rights and obligations were clear. In those circumstances there is a tension between the fundamentally self-interested commercial activity that is negotiation of a contract with an obligation of good faith. This tension meant that the obligation to negotiate in good faith had an ‘uncertain content’ and was therefore unenforceable.

The distinction drawn by the court makes some sense. When there is already a full agreement in existence then it is clear what the intentions of the parties are in respect of fundamental issues such as risk allocation. When there is no full agreement in existence it is difficult for a court to conclude what the parties may have intended in terms of risk allocation, even where there is a list of key terms to be included in the final agreement.

Of course, this may depend upon the level of detail of the list of key terms. A list which is 20 pages long and detailed may, in fact, sufficiently disclose the intention of the parties for a court to find an obligation to negotiate in good faith to be enforceable.

IMPLICATIONS FOR DRAFTING MOUS

The case is a timely reminder that parties drafting an MOU must be clear as to their intentions. In particular, if they intend for the MOU to be binding, they must take care to draft the MOU in a way which is enforceable.

In drafting MOUs, care should be taken to:

• Consider whether an MOU is appropriate at all. For pre-contractual issues another form of contract, such as a Confidentiality Agreement, may be more appropriate.
• Express clearly whether the MOU is legally binding and where only part of the MOU is intended to be binding the part should be clearly specified. Avoid phrases which may introduce an element of inconsistency, such as stating that an MOU is binding but elsewhere using the phrase ‘subject to contract’.
• General obligations to negotiate with reasonable endeavours, best endeavours or good faith are likely to be unenforceable.
• If the parties still wish to use an MOU as a framework for negotiations then to ensure that the MOU is enforceable, as much detail should be agreed as possible. The less left to future negotiation the more likely that the MOU will be enforceable.
• General phrase such as ‘at fair market price’ and ‘on the usual terms’ should be avoided. In respect of pricing issues, alternatives include using independent benchmarks, formulae or at least a more detailed description of the intended approach or purpose behind the pricing methodology.
• There should be an end date which terminates the MOU if agreement cannot be reached by that date. To leave open a ‘binding’ MOU raises risks for a party who has formed a conclusion that agreement cannot be reached and wishes to explore alternatives. Consider stating what the parties intend to be the consequences if agreement cannot be reached.

JO DANIELS

Jo Daniels has more than 20 years of experience in mining and natural resources, infrastructure, competition and regulatory, government law and general commercial work. Specifically in the energy and resource sphere, Jo acts for clients on their investments and operations across the infrastructure industry. She is currently completing her PhD in heavy haul access regulation through The University of Melbourne.

ALEISA CREPIN

Aleisa Crepin is an experienced construction lawyer and provides a full range of operational and project delivery advice, disputes avoidance and dispute resolution services. Aleisa has more than 11 years experience advising clients in the construction and major projects industry. She has advised on some of the most significant construction projects in Queensland, including the ongoing CSG-LNG Upstream projects.