The legal effect of an MOU
Sundorne Products v Geminor [2024]
It is very common for suppliers to partner together for the purposes of submitting some form of joint bid. Often the parties to do this on the back of a ‘high level’ MOU. Even more common, the parties are successful and they start work without having reached agreement on any long form, binding contract. This can give rise to problems.
Facts:
Sundorne Products v Geminor involved a document titled a Memorandum of Understanding (MOU) entered into between the two parties in relation to submitting a tender to the Isle of Anglesey County Council in respect of waste haulage and treatment services. The MOU was signed on behalf of each of the parties. It said its purpose was to establish the principles of the relationship. It talked expressly about a ‘joint bid’ although it isn’t clear exactly what was meant by that as the bid seems to have been submitted in Sundorne’s name only but identifying Geminor as a participant and with a ‘letter of support’ from them. The MOU envisaged that the parties would negotiate together ‘in good faith’ with the aim of entering into a Consortium Agreement to define the scope of work and the obligations of the parties in more detail. The MOU did not specify whether it was intended to be legally binding. The parties did not specify whether the MOU was “subject to contract”. The MOU said, “In the event of the award of the contract to the Parties on terms accepted by each of the Parties in writing, [they agreed] to perform the Contract on the terms set out in this Agreement.” It went on to say, “The Parties undertake to use their best efforts to conclude and sign the Consortium Agreement as soon as possible”. The MOU noted that it would stay in force until either the parties agreed in writing to terminate, or the Council decided not to proceed with the services, or if the parties entered into the proposed Consortium Agreement.
Sundorne submitted the tender to the Council. The bid was accepted by the Council and a formal contract was concluded between Sundorne and the Council. Sundorne began negotiating the Consortium Agreement with Geminor but it was never concluded. In the meantime, the parties began to act on the MOU and the haulage and treatment of the waste began. Disagreements arose between the parties. The High Court had to determine whether there was a binding contract in place between Sundorne and Geminor and the basis of that contract.
Decision:
The judge found that the parties had concluded a binding agreement with the intention of creating legal relations. They had concluded a contract which consisted of the MOU and certain associated correspondence. The judge said that he was satisfied that there was sufficient certainty as to the terms of the contract. Reaching this conclusion, the judge noted that the parties had proceeded with the services as described in the MOU, that no grounds for termination had arisen, (according to the MOU terms), and that the parties had not concluded the Consortium Agreement. The judge concluded that the MOU was "…not just a stepping stone on the way to a future contract; it actually constituted a contract in and of itself".
Geminor’s ‘offer’ had been accepted by Sundorne’s conduct, in this case Sundorne submitting the tender to the Council and communicating that fact to Geminor.
By refusing to accept waste, Geminor had committed a repudiatory breach of contract.
Points to Note:
- Calling a document an “MOU”, “letter of intent” or “heads of agreement” will not be enough to make sure that it is not legally binding. You must be clear in the document itself whether it is intended to be legally binding, in whole or in part. If you do not intend it to be legally binding, you should mark documents with "subject to contract". This can help show that the parties did not intend that document to create legally binding relations.
- There is, however, a residual risk that the conduct of the parties may nevertheless impact whether a document is legally binding even if you have expressly indicated that the MOU is not legally binding. The courts could find an MOU to be legally binding where the parties have acted upon it and started performance even if the MOU envisages a more formal agreement will follow. This could mean that you are bound to the obligations set out in the MOU even though it may not include all of the provisions ideally required to protect your position.
- Entering into an MOU that may be binding and starting work or permitting work to start may make it harder to introduce additional terms at a later date.
- Include clear termination rights in the MOU if, ultimately, you cannot agree on the terms of a comprehensive agreement.
- If a comprehensive agreement is subsequently entered into, clearly state what the impact is on the MOU. Also make clear when the comprehensive agreement becomes operative. The parties may well want it to have retrospective effect.