Understanding MOU’s

Many stories carried in the Jamaican press recently have surrounded a type of document known as a Memorandum of Understanding (“MOU”). The privatization of the Kingston Container Terminal, the Public Sector Wage negotiations, Student Housing at the University of the West Indies, and perhaps most controversially, the Logistics Hub, are all examples. An overview of the legal standing of this popular, and sometimes infamous, document is likely to be helpful to our readers.

An MOU is a document recording the basic terms of a proposed transaction. Conceptually, the idea is that the parties sign the MOU in the pre-contractual stages of negotiations with the intention of continuing negotiation and ultimately signing a more formal contract at a later stage. In general, an MOU can be used to provide a framework for the parties to negotiate a final contract, as well as, record the key terms agreed on up to the date of the MOU.

An MOU can offer some degree of comfort that a deal is possible before the parties incur further expense. Mechanisms dealing with pre-contractual issues, such as exclusivity, confidentiality, due diligence and intellectual property would generally be included.

As far as a pecking order of strictly construed agreements is concerned, an MOU would be less formal than a contract but include more details than a “gentleman’s agreement”. In order to prepare an MOU then, both parties start in a planning stage to determine what they want or need the other party to provide, what they have to offer, what can be possibly negotiated, and the rationale for an MOU. Specific terms which are central to the desired agreement are usually included, such as how long the agreement will last and the method of termination available to either party. After these details are ironed out, both parties sign the MOU.

It is important to note that although MOUs carry similar characteristics of a contract, MOUs are generally meant to be non-binding. However, there may be exceptions and stipulations that can lead to legal consequences for parties who breach the terms of an MOU. For example, if the content of an MOU is tantamount to that of a contract in language and intent, then a court may rule that it is a contract, no matter what the title of the document displays. It is also possible for an MOU to be treated as generally non-binding, while at the same time including specific provisions that are binding, for example, as privacy or nondisclosure covenants. Those provisions may stipulate that non-compliant parties are to be held liable.

MOUs are like magic wands for persons dodging bureaucracy and dancing around enormous amounts of red tape. It is the informality of these documents which allow bureaucrats to avoid the scrutiny that contracts usually face. MOUs tend to fast-track processes that under normal circumstances would dampen implementation and cooperation. For example, in some jurisdictions, for government funds from various departments or ministries to be co-mingled for a common objective, an MOU is the only way to get the project done. There have been many MOU’s throughout history that have significantly impacted the world we live in.

In 1997, the Bill Clinton led administration drafted an MOU to update the 1972 Anti-Ballistic Missile Systems Treaty to reflect changes that occurred as the former USSR dissolved into numerous successor states. This MOU could not have been composed at a more important time as the world at large was concerned about the security prospects of the former USSR’s nuclear stockpile. In 2012, the United Kingdom signed an MOU with Rwanda in order to secure the return of defendants to face genocide charges.

MOUs have also been used to regulate events when neither party wants to formalize the relationship contractually for varying reasons. In 2004, when John Kerry ran for the presidency of the USA against the incumbent President George W. Bush, the television debates were controlled through an MOU. The 32 page MOU laid out the number of debates, the topics to be covered, and the moderators. The document went into great detail about what the candidates were allowed to carry on stage, as well as, prohibited them from using any footage or content from the debates in subsequent campaign advertisements (probably Bush’s idea).

The wide and varied considerations mentioned above are an indication of the fact that MOUs can say whatever the parties want to say; there is no set form of an MOU. The Minister of Industry, Investment and Commerce Anthony Hylton was recently probed by members of the media about the specifics of the MOU signed by the government and the proposed suitors of the Logistic Hub Project, Krauck Systems and Anchor Finance Group LLC. In response the Minister said, “let me be clear, an MOU is an agreement to talk”.

Minister Hylton has explained to the public that the MOU he has signed will provide the framework in which the Government and its team can meet with the team of investors to begin to discuss the terms and conditions regarding the various assets that they are interested in. He asserted that the MOU will also foster a non-binding environment in which due diligence questions can be posed and answered in a confidential forum. The current controversy is sparked by the unfavourable results of the relatively light due diligence that the media carried out in relation to the suitors. This situation, as have others in the past, provides some food for thought as to whether the Government should establish a firm policy regarding minimum levels of due diligence that should be carried out prior to signing MOUs with any potential contracting party.

This article is for general information purposes only and does not constitute legal advice.

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