BINDING EFFECT AND ENFORCEABILITY OF MEMORANDUM OF UNDERSTANDING

This review addresses binding effect and enforceability of Memorandum of

Understanding.

Introduction.

A Memorandum of Understanding (‘MOU’) is generally a preliminary understanding

between the parties to a contract, prior to the execution of a formal agreement. It is a

document highlighting the intention of the contracting parties and might also be known

as a Letter of Intent (‘LoI’). MOU is generally executed for creating consensus between

the contracting parties for future contracts and is usually not intended to create any

obligations upon the parties. Primarily, what must be understood is that a MOU is non-

binding and legally non-enforceable and it is only an “agreement to agree” and

highlights business relationship, which, are likely to result in some contract or any

formal agreement between the parties. However, a MOU may create an obligation upon

the parties if a binding understanding is inferred from the clauses of the MOU.

Black's Law Dictionary1 equates a Memorandum of Understanding to a Letter of Intent

and defines it as: "A written statement detailing the preliminary understanding of

parties who plan to enter into a contract or some other agreement; a noncommittal

writing preliminary to a contract".

In BPS Construction & Engineering Co. Ltd v. Federal Capital Development Authority2.

The supreme court of Nigeria defined that "A Memorandum of Understanding or Letter

of Intent, merely sets down in writing what the parties intend will eventually form the

basis of a formal contract between them. Thus, taking into consideration the elements

of a valid contract, an MOU is merely a representation of the intention of the parties,

subject to the execution of a formal agreement".

Furthermore, in the case of Star Finance & Property Ltd. & Anor. v Nigerian Deposit

Insurance Corporation3, the Learned Justices of the Court of Appeal of Nigeria

described an MOU as a document entered into by contracting parties to declare their

intention to contract and to guide them subsequently when they are ready to sign a

legally binding contract. According to the Learned Justices, the contents of an MOU

serve to fix in memory the desire of the parties which is to serve as the basis for a future

formal contract; as it is not the real agreement but a document guiding the future

agreement, and its status is something less than a complete contract.

Whether a document constitutes a binding contract depends only on the presence or

absence of well-defined legal elements in the text proper of the document (the so-

called "four corners"). The required elements are: offer and acceptance, consideration,

and the intention to be legally bound (animus contrahendi)

1 Black’s law dictionary 9th edition

2 SC. 293/2011

3 (2012) LPELR 8394 C.A.

KEY CONTACT

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Head of Litigation

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In business, an MOU is typically a legally non-binding agreement between two (or

more) parties, that outlines terms and details of a mutual understanding or agreement,

noting each party's requirements and responsibilities -- but without establishing a

formal, legally enforceable contract (though an MOU is often a first step towards the

development of a formal contract)4

In international relations, MoU fall under the broad category of treaties and should be

registered in the United Nations treaty collection5. In practice and in spite of the

United Nations Office of Legal Affairs insistence that registration be done to avoid

'secret diplomacy', MoU are sometimes kept confidential. As a matter of law, the title

of MoU does not necessarily mean the document is binding or not binding under

international law. To determine whether a particular MoU is meant to be a legally

binding document (i.e. a treaty), one needs to examine the parties’ intent as well as

the signatories’ position (e.g. in the case of Minister of Foreign Affairs vs. Minister of

Environment). The court held that in determining the nature of the document A careful

analysis of the wording will also clarify the exact nature of the document. A non-binding

written document that states the responsibilities of each party to an agreement, before

the official contract is drafted.

Legal dictionary.net6 defines it as a memorandum of understanding (MOU) is an

agreement between two parties that is not legally binding, but which outlines the

responsibilities of each of the parties to the agreement. An MOU is often the first step

toward creating a legally binding contract. In the U.S., an MOU can be considered

identical to a letter of intent, which is another kind of non-binding agreement that

suggests that a binding agreement will soon follow. To explore this concept, consider

the following memorandum of understanding definition, Memorandum of

understanding refers to A non-binding written document that states the responsibilities

of each party to an agreement, before the official contract is drafted.

In my considered opinion, I would like to partly depart from the position above and

state that; Memorandum of understanding simply refers to the following

“Memorandum of understanding refers to the contract to contract” OR “Memorandum

of understanding also refers to an agreement to agree” or “ Memorandum of

understanding is also defined to mean the letter of intent”. In regard to its binding effect

am convinced to say that contract to enter into a contract is not considered to be a valid

contract in law at all. However, the court will look on whether parties intended to create

legal relations in case of breach.

4 “What is Memorandum of understanding MoU” Instopedia.com Retrieved on 5th march 2019.

5 "United Nations Treaty Collection". treaties.un.org. Retrieved 2019-March-5th

6 (Legal dictionary.net. Retrieved on 7th March 2019)

POSITION OF MEMORANDUM OF UNDERSTANDING (MOU) IN TANZANIA As per the Law of Contract Act of Tanzania [CAP 345 R.E 2002]7, every contract is

agreement but not every agreement is a contract. Only those agreements which are

legally binding are contracts which are enforceable by the court of law.

Furthermore, the question which we should ask ourselves is whether memorandum of

understanding MoU legally binding in Tanzania? Section 10 of the law of contract act of

Tanzania lay down the essential requirements of a legally binding agreement or

contract:

a) There must be an offer made by one party and accepted by another.

b) The consent of the parties must be free and not affected by fraud,

coercion, or undue influence.

c) The parties must be competent to enter into a contract. This means

that they must be more than 18 years old, must be of sane mind,

and not considered as insolvent/bankrupt.

d) There must be a lawful consideration.

e) There must be a lawful object.

f) There must be an intention to create legal relations8.

Therefore, for memorandum of understanding MOU to be enforceable in Tanzania

might fulfill the first-five requirements mentioned above. However, if it lacks the

intention to create legal relations, it is not a contract and is incapable of being enforced

in court of a law.

A distinction has to be drawn on whether the parties intended the MOU to be an

informal agreement which is incomplete and merely an agreement to agree, or whether

it is a complete contract for which the parties consider themselves to be bound. When

the parties merely record their understanding with a clause to negotiate and execute a

formal detailed agreement in future, such an understanding lacks consideration and

intention to create legal relations.

So, for Memorandum of Understanding to be binding enforcement provisions on the

breach by either party must be included in the MoU, this will confirm the parties’

intention to enter into a binding agreement for example use of the word “shall” will give

a binding effect to the MOU.

On the other hand, parties’ intention may expressly give a non-binding effect to the

Memorandum of Understanding (MoU). for example, in Memorandum of

Understanding between the Government of United republic of Tanzania and

Development partners in support of the Public Finance Management Reform

Programmed – Phase IV (2012/13-2016/17) Through the Basket Fund Modality9. Under

clause D (3) it expressly declared Memorandum of Understanding to be non-binding

and it reads as follows,

7 The Tanzania Law of Contract Act CAP 345 R.E 2002

8 Ibid section 10

9 Memorandum of understanding between the Government of United republic of Tanzania and Development partners in support of the public finance management reform program –Phase IV (2012/13-2016/17. and

‘The MoU is neither a binding legal agreement nor does it constitutes an international

treaty and it is not intended to create any legal commitments. it is understood by the

signatories that any matter that is not expressly provided for in this MoU will be

governed by Bi-Lateral agreement that the development partners have signed with GoT.

In the event of any conflict between the provision of this MoU and Bi-Lateral

agreement, the latter will prevail’10.

Furthermore, Memorandum of understanding (MoU) jointly signed on 3rd day of

August, 2014 by the Government of United Republic of Tanzania (GoT), acting through

its Ministry of Energy and Minerals (MEM) and the Government of United States of

America (USG) acting through the United States Ambassador to Tanzania 11regarding

POWER AFRICA, under clause 24 of the memorandum of understanding expressly

declared MoU to have none binding effect as it reads hereunder,

‘This MoU is none-binding and does not impose, nor is it intended to impose any legal

rights and obligations on the participants under domestic and international law’12.

In BI KHADIJA KALUMAGA VS BI PERIS MISSO13. In this case the issue before the court

was whether parities intended to create legal relations? MTENGA J as he then was held

that-:

“Under the present case parties did not intend to create legal relations and their

agreement was not enforceable and he further emphasizes that for the contract to be

valid and enforceable all elements of a valid contract must be present and parties must

intend to create legal relations in case of breach by either party.”

In ABDALLAH SHAMTE VS MUSSA14. In this case the issue before the court was whether

there was intention to create legal relations between the parties in an agreement

(between husband and wife). The High Court of Tanzania held that,

“The present agreement between husband and wife has the intention to create legal

relations and hence enforceable”

And further argued that intention of the parties to create legal relations in case of

breach is necessary for the contract to be valid and enforceable in Tanzania in absence

of that intention the agreement becomes unenforceable.

Therefore, from the two decision of the High Court of Tanzania above for any

Agreement or Memorandum of Understanding (MOU) to be enforceable in Tanzania

might fulfill the first-five requirements mentioned earlier (Ingredients of a valid

contract). However, if it lacks the intention to create legal relations, it is not a contract

and is incapable of being enforced in court of a law.

10 Ibid at page 4

11 Memorandum of understanding jointly signed on 3rd day of August ,2014 by the Government of united republic of Tanzania (GoT), acting through its ministry of energy and minerals (MEM) and the government of united states of America (USG) acting through the united states ambassador to Tanzania

12 Ibid

13 [1981] TLR 177

14 [1972] HCD 9

MEMORANDUM OF UNDERSTANDING (MOU) IN ANOTHER JURISDICTION. Several judgments have been pronounced by various courts under common law of on

the validity and enforceability of a MoU as discussed hereunder.

In the past, based on prior case law, one could ordinarily expect that an agreement to

agree would not be enforceable on the basis that there simply was no contract. Recent

case law, however, illustrates that Courts are looking carefully at each case to determine

if one party is responsible to pay monetary damages to the other when there are

agreements to agree. In the case of Georgian Wind Power Corporation v. Stelco Inc15.,

the parties were at all times dealing with each other at arm’s length in a commercial

context, and were of equal bargaining power for a wind power project. They entered

into two agreements to agree -- a memorandum of understanding (MOU) and an

Agreement to Establish a Land Lease Easement Agreement (AELLEA). After the signing

of both, Stelco (the defendant) sent a letter to Georgian (the plaintiff) terminating both

agreements immediately. This led to the litigation.

“The Court found that there were binding and non-binding terms in the MOU and the

Agreement to Establish a Land Lease Easement Agreement (AELLEA). It also found that

an agreement providing for future agreement can be binding if the concept is

sufficiently clear and discrete to enable enforcement of the agreement between the

parties “

In Georgian vs. Stelco (SUPRA) the plaintiff (Georgian) was entitled to damages of

$75,000 in total for the wrongful termination -- $1,000 in respect of the defendant’s

breach of the MOU and $74,000 for the breach of the Agreement to Establish a Land

Lease Easement Agreement (AELLEA). In making this finding, the Court also found that

there was no contractual duty to negotiate in good faith in the circumstances

surrounding this particular case. However, the Court distinguished between a case

where there is an existing preliminary agreement between the parties and where one of

the parties has agreed to use best efforts to carry out a specific term of the agreement

and the case where the parties have merely agreed to use best efforts to carry out future

negotiations.

In UBA Ltd V Tejumola & Sons Ltd16, Obaseki, JSC explained that: -

"Where a contract is subject to the happening of a contingency, that contract only

becomes enforceable provided the event has occurred or the contingency has

happened. Where the wording of the MOU is such that records the terms which the

parties intend will eventually form the basis of a formal contract between them, it

cannot be expressed to be binding on the parties”.

In other words, a document which is made subject to the execution of an agreement at

a later date is merely a preliminary move in negotiations which may or may not lead to

a formal contract.

15 Georgian Wind Power Corporation et al v. Stelco Inc., 113 O.R. (3d) 81

16 (1988) 2 NWLR (PT. 79) 662 at page.688

As discussed above, an MOU by its primary nature and usage is nonbinding. However,

in cases where the MOU contains the elements of a valid contract, the MOU will fall

within the exceptional circumstance wherein a Court will find that commitment has

been made between the parties, notwithstanding its general nature, and it will be held

to be binding and enforceable (SUPRA).

In the case of BPS Construction & Engineering Co. Ltd v. Federal Capital Development

Authority (Supra), the Appellant and Respondent had executed an MOU for the

provision of infrastructural facilities at designated locations. The MOU was made

subject to signing a formal agreement by the parties, which was contemplated to occur

within 14 days of the execution of the MOU. However, and before the execution of a

formal agreement by the parties, the Appellant had incurred costs for the execution of

the project based on the reliance on the promises, assurances and representations of

the Respondent that a formal agreement will be executed in line with the MOU.

In determining if the MOU represented a binding and enforceable contract between the

parties, the Supreme Court of Nigeria differentiated what constitutes a valid contract in

contrast to an invitation to treat, and held that

‘For a contract to be binding, it must contain the basic elements of offer, acceptance,

consideration and capacity to contract or intention to create legal relationship, as

opposed to an invitation to treat which is not an offer that can be accepted to lead to a

contract’.

Furthermore, Adakai JSC in the case of BILANTE INTERNATIONAL LTD. V. NIGERIA

DEPOSIT INSURANCE CORPORATION17 stated that

"It is trite that before any contract or agreement can be said to have come into existence

in law, there must be an unmistaken and precise offer and unconditional acceptance of

the terms mutually agreed upon by the parties thereto. In other words, the parties to the

agreement must be in consensus ad idem as regards the terms and conditions freely and

voluntarily agreed upon by them".

Following from the above, it is clear that a Memorandum of Understanding is generally

nonbinding and unenforceable. However, the courts will enforce a Memorandum of

Understanding that contains all the requirements of a valid contract i.e. offer,

acceptance, consideration and intention of the parties to be legally bound.

Furthermore, in deciding its enforceability, the court will take into consideration, the

intention of the parties which will be interpreted from the terms of the MOU and the

conduct of the parties after its execution.

Calcutta High court in JYOTI BROTHERS V. SHREE DURGA MINING CO18, when enter-

training the question before it on whether contract to enter into a contract is valid it

held that; -

‘A contract to enter into a contract is not considered to be a valid contract in law at all.

However, the same is not conclusive. The court will rely upon the degree of importance

of such understanding to the parties and to the fact that whether any of them has acted

in reliance on such Understanding’.

17 (1996) 9 NWLR (PT. 475) 634 at Page 656

18 [AIR 1956 Cal 280]

In my view regarding the judgment of the court is that in order for a contract to contract

to be enforceable, it must include all material terms of the agreement leaving nothing

for future negotiation and similarly if the agreement is conditioned on the

happening of the future event that, no fault of the parties, never happens liability do

not attach.

In KOLLIPARA SRIRAMULU VS. T. ASWATHANARAYANA & ORS19. The Supreme Court of

India pronounced a contradicting judgment and it held that; -

‘The fact that the parties refer to the preparation of an agreement by which the terms

agreed upon are to be put in a more formal shape does not prevent the existence of a

binding contract’. I have found the same argument with slight differences with the

honorable judge in this case because like any other contract a contract to make a

contract can fail for indefinites if the trial of the fact finds that it does not include an

essential term to be incorporated in the final contract ,Furthermore judicial avoidance

of contractual obligations because of indefinites is not favored under Tanzania laws and

so when the promises and performances of each party are set forth with reasonable

certainty /the contract will not fail for indefinites.

Furthermore, in JAI BEVERAGES PVT. LTD. VS. STATE OF JAMMU & KASHMIR AND

OTHERS20 ‘The Supreme Court held that; - ‘If the conditions to the Memorandum of

understanding are otherwise acted upon, the parties to the MOU will get the benefit

arising out of the Memorandum of understanding’. I can confidently agree that the

memorandum of understanding is not enforceable as a final settlement agreement

because the memorandum of understanding by its own terms ,envisioned that

settlement would be created in the near future thus if there is no meeting of minds

and one party acts in reliance to memorandum of understanding while memorandum

of under- standing was at best a contract to make a contract with some final terms left

to be determined then he will get the benefit arising of the agreement and this

position can be simply summarized as follows that “contract to make future contracts

are not “per se unenforceable; in fact they may be just valid as any other contract.

In NANAK BUILDERS AND INVESTORS PVT. LTD. VS. VINOD KUMAR ALAG21. The court

held that ‘A memorandum of understanding does not have to be necessarily titled as a

‘memorandum of understanding’. The nature of the document is not decided on the

heading but on the content that is written. Mere heading or title of a document cannot

deprive the document of its real nature’.

The judge in delivering judgment in this case has exhausted each and every thing I was

thinking about memorandum of understanding it is Cleary evidenced the nature of

document is not decided on heading but on its contents and mere heading or title of the

document cannot deprive the real nature of the document, which literally mean that

the document can be titled as memorandum of understanding but still have legal force

compared to the document that is titled a contract.

19 [1968 AIR 1028]

20 [2006 (4) SCJ]

21 [AIR 1991 Del 315]

In BRIKRAMKISHORE PARIDA V. PENUDHAR JENA22 “The court held that the test of an

intention to create legal relations is an objective one. It may be that promissory never

anticipated that his promise would give rise to any legal obligation but if a reasonable

man would consider that he intended so to contract, and then he will be bound to make

good his promise”.

For my understanding and for the sake of clarity and avoidance of application of

reasonable man’s test and the issue of objectivity in ascertaining the party’s intention

to create legal relations, Memorandum of Understanding to be binding enforcement

provisions on the breach by either party must be specifically included in the MoU, this

will confirm the parties’ intention to enter into a binding agreement for example use of

the word “shall” will give a binding effect to the MOU. However, if memorandum of

understanding lacks the intention to create legal relations, in my view it is not a contract

and is incapable of specific performance.

In ALLEN V. AETNA CAS. & SUR. CO23., The court held that “If a written document

contains terms that provide for these elements and indicates that the parties to that

document intend to be bound by those terms, a court could very well rule that the

document is an enforceable contract regardless of what the document is called. In other

words, one must never assume a document is not an enforceable contract just because

it is called a Memorandum of Understanding or Letter of Intent, or a Term Sheet.

Although there are legal distinctions between a definitive Agreement (by whatever

name so called) and a Memorandum of Understanding, there may be no legal or

practical difference if they are written with similar language. The key is to focus on

whether the parties intend to be legally bound by the terms of the agreement and if so

drafted, a legally enforceable contract would have been created regardless of whether

or not it is called a Memorandum of Understanding.

CONCLUSION

In light of the above, it can be concluded that the enforceability and binding nature of a

MOU depends upon the content, nature of agreement, language and intention of the

parties to it. In cases where in the MOU is in the nature of a contract and fulfills its

essentials, it is held to be enforceable. A major factor to decide whether a MOU would

be binding is the intention of parties while executing the MOU and their conduct post

execution.

22 (AIR 1976 ORISSA 4)

23 Allen v. Aetna Cas. & Sur. Co., 222 Va. 361 (1981)

This publication is for general guidance only and it is not intended to be a substitute for

obtaining a specific legal advice. Advice should be sought about specific circumstances.

If you would like further information, please contact Salim Juma Mushi or Cleophace

Dyegura of Dexter Attorneys;

Burka Avenue Burka Estate, Plot No. 8/3, (Next to Arusha Coffee Lodge),

P. O. Box 1976, Arusha Tanzania.

Cellular +255 688 498 912,

Telephone/Facsimile (+255 27) 2543321

Electronic mail salim@dexter.co.tz

Website www.dexter.co.tz