EXPLORING THE CONCEPT OF A MEMORANDUM OF UNDERSTANDING (MOU)

In today’s linked and collaborative business world, companies, organizations, and governments form partnerships to enhance their strategic objectives and realize mutual benefits. These dependence relationships are desirable due to the increasing cases of shared resources, expertise, and capabilities. Similar to various setups, partnerships rely on a certain level of organization. To assist in this, there are a range of tools known as “preliminary agreements.” These tools can be known by different names such as letters of intent, heads of agreement, memorandum of understanding, or commitment letters. The Memorandum of Understanding (MOU) is considered one of the most widely recognized among them.

An MOU is generally a non-binding agreement that gives a broad perspective of an accord between two or more parties and states their intention to undertake a transaction or enter into a business arrangement.

It generally highlights:-

 

the profiles of parties;

their intended responsibilities and roles under the agreement;  the subject matter of the intended collaboration; and

the possible outcomes of the arrangement.

 

While an MOU may not always constitute a legally binding document, it is more formal than a handshake or a verbal agreement.

The magic of an MOU

 

The quirk of an MOU lies in its inherent ability to promote collaboration while offering a cordial atmosphere for parties to demonstrate mutual trust. This room for free play is not a quality that can be guaranteed under strict contractual agreements. Parties in an MOU agreement usually enjoy a sense of indulgence when they operate under the promise of non-litigation. It is in the same spirit that some legal experts suppose the general unenforceability of an MOU to be a feature and not a bug.

The sense of sincerity is pronounced in cases where parties take an MOU to be final and see no need to pursue any further contract. It may be surprising to many, that a sizeable number of investments are finalized under such MOUs rather than strictly enforceable contracts. This amiability has been temporarily extended in the past, in cases where an MOU lays the groundwork for a full-fledged contract. With time, we’ll see the outcome of both decisions and make recommendations for either situation.

This article will highlight the following key points:

 

a brief history of MOUs;

the benefits and disadvantages of MOUs;

exploring why some parties are in favour of MOUs;

understanding a way to secure the interests of a party that has relied solely on an MOU;

and

  finally making a resolve on their enforceability.

 

1. History of MOUs

 

There is no definite account of when the use of MOUs became prominent in commercial and intergovernmental affairs. However, there exists a record of famous MOU-like arrangements between high-contracting parties. Notably, states have relied on them as a flexible and warm way of promoting diplomatic relations without entering into strict and enforceable treaties. The attributes of an MOU make it suitable for the craft of diplomacy which demands a balance of hospitality and friendly engagement while equally safeguarding one’s international interest. For instance, states that want to mend broken ties may seek reassurance while at the same time, warding off any undesirable suggestion that they still hold onto past hostility. This is because the formality of a treaty may not always guarantee a sense of newfound friendship.

This explains why MOUs greatly thrived in the diplomatic fields and primarily among state parties. A contemporary example is the MOU signed between the government of Indonesia and the Free Aceh Movement (AGM) which contributed a great deal to ending the separatist conflict in the

 

province of Aceh. While the MOU was not a magic bullet since isolated bursts of violence were still evident, it achieved what the previous Cessation of Hostilities Agreement (COHA) could not; a substantial halt to mass death and terror. The deduction from this brief account is that the MOU targeted the root causes of the problem in Aceh compared to COHA which was strictly enforced only to safeguard the interests of high contracting parties.

Over time, MOUs have gained prominent use ranging from various corporate-commercial uses and in Intergovernmental co-operations based on similar advantages. A major takeaway is that, in this age of contracting states and outsourcing capabilities, most governments use MOUs as a way of assessing the viability of collaborations.

1. General advantages of using MOUs

 

There is a myriad of reasons why some parties prefer MOUs as a first stage for investment negotiations, whether under private corporate arrangements or governments. The following are the notable perks:

MOUs are simpler to negotiate compared to a legally binding agreement. This is owing to their broad coverage of issues compared to contracts. The terms are also easier to alter at the convenience of a party since some MOUs only require written requests for consent from a party. They are also simpler to negotiate, given that where they function as stepping stones to more formal agreements, there need not be a thorough ironing out of legal issues in a bid to evade legal implications.

When MOU agreements are entered into by parties extremely new to each other, they help

to flag any major incompatible qualities that could stand in the way of future obligations or would be too late to detect at an advanced stage. In the wake of impersonal commercial arrangements that do not accommodate room for nurturing familiarization, MOUs offer a prudish avenue for identifying and detecting any adverse characteristics of the parties.

Further, they help to weigh the sincerity of the other party to commit to the relationship. A party can assess the other party’s true identity and dealings to discern how solemnly they intend to pursue their partnership. This is a prudent way of identifying any potential cases of future breaches and preemptively evading them in time to mitigate against loss.

The most important perk to a financially conscious party is that they are arguably a less resource-intensive way of testing the waters. This is because MOUs may require less financial resources and personnel to get into. Additionally, legal experts may also offer lower charges to curate and review MOUs compared to actual contracts. They also require fewer human resources to deliberate over, monitor, and evaluate performance.

They are a good way of evaluating the viability of new ideas. The current proliferation of entrepreneurship and innovation has seen a market overflowing with tech startups and ‘Fin- techs’. As such, companies and governments should tread with caution when entering into agreements with parties of questionable dealings. An MOU is a non-intrusive way of understanding the substance of the other party’s enterprise. The main reason for seeking out viability is that a new idea is an uncertain scope of business. If successful it could be a goldmine and if not, could mean a certain loss for investors.

They offer good Public relations (PR). When companies announce their new ventures, they customarily expect the publicity exercise to generate immense advertisement potential. It is not uncommon to see companies market corporate contracts as collaborations rather than strict contracts because they bolster their capabilities. For instance, using the word “Understanding” gives the scheme the preferred façade of an association rather than a lifeless

 

corporate project. In certain cases, the effect of the MOUs may be tenfold if the partnership strategically involves a reputable party.

1. Benefits accruing to the government through the use of MOUs

 

MOUs confer several advantages on governments across the world. In recent years, these advantages have sparked a strong liking for MOUs among many Kenyan state organs and consequently whipping up an astronomical spike in their use.

These advantages include:

 

  Bending strict procurement rules

 

The Kenyan government has adopted a global trend where governments are now increasingly outsourcing the capabilities of private companies. This is evident in service delivery sectors such as the electrification of remote areas and the adoption of technology in schools. To govern this endeavour, the Constitution of Kenya 2010 has elevated procurement to a level that requires the constitutional standards to be adhered to. Article 227 of the Constitution of Kenya demands that the standards for procurement of goods and services be governed by “a system that’s fair, equitable, transparent, competitive and cost-effective”. This means that provisions of the Public Procurement and Disposal Act of 2015 (henceforth “PPADA”) now reflect the constitution. Our courts have repeatedly described the Constitution as conscious of the historical problem of corruption in procurement and wish to remedy that.

Governments in other parts of the world have relied on MOUs to bend the rules governing their procurement processes. Luckily, and for the good of the public interest, the same cannot be said of Kenya under the Constitution and the PPADA. Initially, the framework before 2010 posed challenges because it could not cover all areas well enough to ensure that the system being used to procure the goods, services, and works was efficient, fair, corruption-free, and delivered value for money for the country. Today, the PPADA ensures that the process is strongly overseen by the Public Procurement Oversight Authority. The PPADA also mandates a formalization of successful procurement with successful entities getting into business with the Government.

Section 135 of the PPADA terms such successful agreements between a procuring organ and a private entity as contracts. This allows latitude to argue that, by obligating the Government to seal the deal through the said contracts, it legitimizes any document as such, whether it is an MOU or otherwise.

However, to ‘cheat’ the procurement framework, MOUs are used in the guise of mere collaboration while in reality, public resources exchange hands without accountability. This is because, in jurisdictions where procurement lacks an accurate definition, collaborations between governments and private entities may risk being labelled as soft engagements rather than commercial agreements which have dire implications for the taxpayer. This has been the case in most instances where MOUs are exempted from the procurement assessment processes.

 To Further political and diplomatic missions

 

The art of diplomacy is a preserve of the best prudes. Prude is used with utmost respect here. In this context, diplomatic relations can only be sufficiently carried out by persons who know how to

 

tread the fine line between displays of nicety to foreign authorities and safeguarding the interests of one’s home country at the same time. Formal agreements which are enforceable in law, are suitable for giving assurance to either party that any prejudicial actions calculated to evade obligations are guarded against.

However, a heavily fortified agreement aimed at promoting international relations may not come off as a show of trust and mutual goodwill. An MOU outlines the interests of the agreement between countries while also giving ample room for countries to show trust. Surely, a well- meaning party state will do the needful, whether they are watched or not. This explains why most countries are hesitant to implore their counterparts to enter into actual contractual agreements.

  For flexibility reasons in interdepartmental affairs

 

As aforementioned, MOUs require fewer resources and mobilization of less effort in canvassing the agreement. It is therefore easier to get into and fewer state officials are required to formulate it. This helps the government to mitigate the effects of departmental bureaucracy and hasten its response to the needs of the citizenry. Externally, where an MOU aimed is used to collaborate with private entities to realize important service delivery, the government can finalize and achieve such demands quicker than pursuing lengthy avenues of approval.

The hurdle of bureaucracy in the modern administrative state remains alive, and most governments can use a little flexibility to hasten their dealings by opting for MOUs.

  To counter the problem of Dualist legal systems

 

When it comes to international cooperation between states, parties may need to demonstrate their commitment through treaties as has been the practice for centuries. However, in the age of constitutional infatuation and a need to harmonize legal orders, some countries require that any extra-jurisdictional agreement creating legal obligations for the state or modifying domestic conditions be translated into national law for it to become binding or operational. A binding agreement that takes the form of a treaty or convention may therefore need to be made into statute for the obligations espoused under it to be carried out fully by the country’s government.

As we have seen, this may work against the desire for expedition especially where an agreement needs parliamentary approval before instruments of ratification can be executed and subsequent debates before enactment into national law by the same parliament. The Government of Kenya has luckily been unburdened by the 2010 constitution where Article 2 (6) automatically legitimizes treaties and conventions into laws of Kenya under it. In countries where governments aren’t too lucky to enjoy this latitude, solace is found through MOUs which can’t be legally defined as either treaties or conventions.

Nevertheless, the UN advocates for the registration of interstate MOUs under the broader category of treaties and conventions for reasons such as prevention of secret diplomacy, record and tracking, and legitimation.

 

1. The drawbacks of using MOUs

 

In pursuit of the magic of MOUs, some merchants demand a price for the magic potion. Some may demand blood, others a pound of flesh like the proverbial shylock, and others a mere lock from your long-grown hair. These are figurative conceptions of the various prices paid by parties under unfortunate circumstances after contracting through MOUs. The main price paid by parties is elaborated hereunder:

  Lack of legal enforceability

 

This is arguably the main enigma that stubbornly trails any discussion on MOUs.

 

It is trite that MOUs are generally unenforceable in the realm of commercial, corporate, and contract law. As stated earlier, this is also an enticing factor for many parties who greatly rely on the promise of non-litigation before entering into commercial relationships. Some parties are wary of the court’s involvement if they fall below the expectations. When dealing with such parties, the non-enforceability of an MOU may be the sole reason inducing them to move on with the deal.

MOUs are treated as non-enforceable agreements mainly because of the intention formed by the parties. However, some judges have proceeded to say that the name of the document in which terms of the agreement are laid out does not matter, especially where it is manifestly deductible that most or all elements that denote a contractual relationship are present. Simply put, where the contents of the MOU show that there was an offer emanating from one party and an acceptance from the other followed by consideration and an intention to be bound is inferable, then the agreement is enforceable regardless of what it is named. It does not matter whether they agreed upon and decided to call the document an MOU or a contract or even a “document of consensus”. Provided that in certain circumstances, requirements of formality such as a need for written agreement are fulfilled.

What various Courts have to say about the enforceability of MOUs

 

Judge A. Mabeya in Eldo City Limited v Corn Products Kenya Limited & Another 2013 eKLR stated that the enforceability of an agreement depends on the intention of the parties to be bound. Therefore, where a party’s demonstration of commitment induces reliance by the other party, their intention is the most important thing. The courts are likely to rule in favour of the existence of an enforceable contractual relationship regardless of whether the agreement was crystallized in a document called an MOU or a contract.

He went on to state that there’s no problem if the parties decide to include a clause expressly ousting litigation to enforce, provided that a judge who properly directs themselves will determine whether a contractual establishment arose or not. It therefore follows, upon concluding that a contract is present, it becomes the province of the court to aid enforcement.

The judge also clarified that proof of seal of bargain and consensus was key in demonstrating an enforceable agreement whether it was contained in a formal document or not.

 

In support of this exceptional stance, there’s the case of Masters v Cameron (1954) 91 CLR 353 (1954) 28 ALJR 438, where it was held that the enforceability of preliminary documents, for instance, where an MOU is the source of controversy, depends on some identifiable situations. The learned judge narrowed it down to three possible situations. In the first two situations, a contract can be said to arise when:

Parties have reached finality and immediately intend to be bound to the performance of terms but at the same time propose to have the terms restated in a fuller and more precise form (emphasis on the fact that there’s nothing different in the ultimate version of writing).

Parties have completely agreed and do not intend to abandon their words but have agreed that one or more terms are conditional upon the execution of a formal document.

The intention of the parties is not to make a concluded bargain at all unless they execute

a formal document.

 

The Eldo City case (above) was an appeal for the award of an injunction and these findings were key in determining whether there was a case with a high chance of success. The judge hinted that the high likelihood of the MOU espousing a contract was proof of a prima facie case. The learned judge went on to assert that whether an MOU or any other interim/ preliminary agreement was enforceable, was a matter of construction and to a larger extent legal analysis.

While citing the case of Smith v Cook (1891) AC 297 at 203, the judge went on to iterate that the most important duty of all before the court is to give effect to the intention of the parties. This means that the court must look at the language of their actions and words and decide unless it is so obvious that the intention to be bound is absent. Lord Denning in Smith v Cook (Above) stated that the only language meaningful to the court is a party’s actions since it is impossible to read minds and possibly believe a party’s assertion that they did not intend to be bound.

In line with these arguments, it’s plausible to say that since MOUs are not readily enforceable, a party must make their intention to be bound or not, as clear as possible. This eases the Court’s work when interpreting the language of the MOU together with their manifest actions.

1. Other drawbacks would include:

 

  Ambiguity in terms

 

MOUs, by their nature, may be intentionally vague to allow flexibility. However, this ambiguity can lead to misunderstandings of the document. Parties may find themselves at odds over what was originally agreed upon due to a lack of clearly defined obligations and expectations.

 Potential for delays

 

Parties may use MOUs as a stalling tactic, which can hamper progress in a negotiation. This is because MOUs are often precursors to formal agreements but overreliance on them can lead to delays in finalizing binding contracts.

  Dependence on good faith

 

MOUs rely heavily on the goodwill and commitment of all parties involved. If any party acts in bad faith in the collaboration, some of the MOUs provide little leverage to compel compliance or

 

continued participation.

1. Safeguarding interests in transactions concluded through an MOU

 

Parties that rely on MOUs to enter into contractual relationships need to be aware of methods of guarding against undesirable events such as possible breach of contract and against the drawbacks as earlier discussed. These safeguards should also be deployed to protect interests especially those that existed before the agreement. This is because a breach of contract may result in irreparable damage if not remedied in time or preemptively evaded. Surely, when all fails, any business should be assured of something to return to.

These safeguards are as follows:

 

  Involvement of legal experts during drafting

 

Consultation with a certified advocate is the first step towards ensuring that an MOU is drafted and captures the intention of the parties as clearly as possible. Like many other documents, one prepared by a legal professional is better suited to withstand the vagaries of legal trouble. Given that the central concerns of any party entering into a contractual agreement would be how accurate and reliable their papers can be, there is no better way of seeking assurance than having them drafted by a lawyer or at least having the exercise overseen by one.

This recommendation is advocated for in a Canadian report: Memoranda of Understanding and the Administration of Anti-organized Crime. The security officers expressed their discontentment regarding agreements drafted without the hand of a legal expert and questioned whether they stood a chance before the law. They went on to demand that any future interdepartmental MOUs have the input of a lawyer.

 Due     diligence    about    statutory    requirements           (especially when     dealing        with                     the government)

All contractual arrangements must satisfy the element of legality. A contract that fails this test is said to be invalid from the start. Standards for what is legal may range from the subject matter of the agreement to the formalities of execution (procedure).

MOUs are not exempt from these requirements and it is wise for parties to understand the provisions of law. Collaboration with governments is subject to the law.

In the case of Grana Limited v National Social Security Fund (NSSF) (Civil Appeal E028 of 2020), Justice David Majanja ruled that section 72 of the PPADA places responsibility on the procuring entity and the contractor to comply with statutory requirements, particularly under the PPADA 2015 or any other written law. In this case, Grana Limited had been procured to supply panels for NSSF’s exhibition. Sometime later, through an employee of NSSF, it was instructed to do some additional work including wall branding. These extra-legal arrangements were to the detriment of Grana Limited which was never compensated despite carrying out the job as instructed. Justice David Majanja had to concur with the decision of the Magistrate of the lower court, that business with the Government is no ordinary business, hence, contracts with state organs are subject to the scales of the law no matter how incidental they may seem. He went on to write a half-

 

hearted judgment since the strict procedures as required by the law were not followed when Grana Limited entered into a subsequent agreement with NSSF. The court had no choice but to deny Grana Limited the relief sought. He dismissed the appeal and parties to meet their costs having flouted the law.

  Deployment of independent non-disclosure mechanisms

 

Often, in the course of transactions preceding an agreement, there is a lot of free exchange of information either intentionally or subliminally. It is important to know that openness during dealings and business transactions is encouraged concerning the duty to exercise positive representation and good faith towards the other parties. However, it is also obvious that this may come at a price especially where sensitive proprietary information exchanges hands. Unlike MOUs, mechanisms such as a Non-Disclosure Agreement (NDA) are readily acceptable as enforceable given that a comprehensive NDA satisfies all the elements of a contract and from there draws its basis. Most NDAs are independent agreements that are said to embody the crucial element of Consideration. Consideration under NDAs becomes manifest when Information is given by one party and in return, the other party promises not to reveal it.

 Inclusion of Confidentiality clauses within an MOU

 

Apart from NDAs, other allied mechanisms include using confidentiality clauses within the MOU.

 

The stubborn question is, if an MoU is generally non-binding, can some of its sections possibly be binding? It is not strange that parties who allege an MOU is not binding, may also advance that some segments of the same are binding. Truly, this kind of assertion is intriguing and raises substantial questions of law.

Clauses of confidentiality may be binding for several reasons:

 

1. They embody an independent agreement in their own right especially where there are separate negotiations over the specific clause.
2. Where a contract has been declared non-binding, it is ordinarily appropriate to be in favour of the preservation of the parties where they stand to reap no benefit but stand to lose if their proprietary information, shared during negotiations and within the agreement, is disclosed.
3. They contain an important element of

 

In some instances, this selective enforceability of confidentiality clauses is the effect of the doctrine of severability. This doctrine allows enforcement of sections of a contract that the court finds to be valid.

 Taking advantage of review opportunities

 

Most agreements under MOUs stipulate periods for review whether quarterly, semi-annually, or even at the convenience of any party. These windows allow parties to lodge any variations to the agreement they may so desire. For example, if a party detects anything that needs to be ironed out in the interest of their bargain, they may initiate renegotiation. A window for review is a good opportunity to assess how far the other party has gone in discharging their obligations. It also offers adequate avenues for monitoring and early detection of possible breaches.

 

1. Conclusion

 

MOUs are generally harder to enforce or convince the courts to adopt them as valid contracts. This is because a litigant has to go a step further and demonstrate beyond what is ordinary that the contents of the MOU amounted to a contract, most importantly, to demonstrate whether there was an intention of the parties to be bound to the obligations therein.

Nevertheless, the empirical attitude of our courts in recent years demonstrates a willingness to qualitatively interpret agreements and infer a dint of contractual relationship between parties.

It is the unequivocal position of this article that while a comprehensive contract fortifies a party’s interests more concretely, there need not be any cause for alarm when relying on MOUs to enter into agreements. This is because MOUs serve a purpose but only if meticulously constructed.

We at WKA Advocates have a dedicated Contract Law department. Should you develop an interest in getting into an agreement with another party, kindly contact us for our services to ensure your rights are duly protected.

We hope this information is helpful in understanding the nitty-gritty of MOUs. Please note that the contents of this newsletter are intended to provide a general guide to the subject matter. It should not be relied upon without legal advice on its contents.

Authors

Founding Partner
William Karoki

Associate
Florence Mwende

Candidate Attorney
Victor Mwangi