“MOU”, “LOI”, Deed or Agreement – A Legal Minefield
Clients often ask us to draft or review Memorandums of Understanding (MOU's) or Letters of Intent (LOI’s) that the parties to a commercial arrangement have negotiated. In almost all cases they are already signed by the clients on the understanding that MOU’s are not binding. That is not always correct. In fact, most MOU’s and LOI’s are (unintentionally) binding on the parties – and sometimes others that expressly say they are not binding should be. They are very dangerous documents if not properly understood. Fully negotiated agreements (or deeds in some cases) should be considered as prudent alternatives.
Each circumstance will require specific advice to ensure that the appropriate document is utilised however the following is generally applicable:
Memorandum Of Understanding
An MOU is generally used when the parties have good intentions and wish to proceed in relation to a commercial enterprise but do not wish to bind themselves to anything particular at that time. In reality, is it just another form of agreement or contract. The issue with these documents is normally that some of the provisions should be binding (confidentiality, exclusive dealings, intellectual property, contribution of initial cash or services and payment of costs) whereas other provisions of the MOU should not. It is essential that these different provisions are dealt with in a way that protects the parties to the MOU.
Letters of Intent
This is, in reality, a document that is materially the same as a Memorandum of Understanding and the same precautions must be exercised.
So should you use a Deed or an Agreement? And what is the difference?
The content of a Deed can quite frequently be very similar to the content of an Agreement. The major benefits of using a Deed are:
- An Agreement is only binding when both parties have completed all the necessary requirements (usually by signing and exchanging). A Deed is binding on each party immediately that party signs the Deed (irrespective of whether the other party has signed).
- If consideration is absent or there is some doubt about the applicability of the consideration in an Agreement, the agreement can be found to be unenforceable. A Deed is valid even if no consideration passes between the parties.
- You can have a one party Deed (a Deed Poll) where only one party is obliged to do something. You cannot have only one party to an Agreement.
- A Deed can be used to settle claims.
- Subject to specific legislation a breach of a Deed can be enforced within 12 years after the date of the breach. A breach of an Agreement can only be actioned 6 years after the breach.
- There are certain interests in land that must be dealt with by Deed only.
Warning
In some jurisdiction there are significant revenue considerations to consider before choosing how best to document a transaction. Formalities For deeds and agreements to be valid and enforceable there are certain formal requirements that must be met. If they are not included in the relevant documents then they may not be enforceable.
Things as simple as how the parties sign the document can make a significant difference. For example, if signing on behalf of a company it is ordinarily best to ensure that the parties comply with Section 127 of the Corporations Act 2001. Similarly, Section 38 of the Conveyancing Act 1919 requires deeds to be signed in a specific way, in particular it requires that a deed be ‘sealed’ and properly witnessed.
Sloppy Preparation Can Be Costly
In a recent Queensland Court of Appeal decision a document used by the parties was variously referred to as an Agreement and a Deed. The judge found:
- That the language used in the document was consistent with an Agreement, but the document was called a Deed.
- There was no need for a Deed since there was consideration.
- The parties had negotiated with a view to entering into a mutually binding Agreement and the mere fact that the documents was entitled “Deed” did not necessarily make it a Deed.
- An Agreement is binding on the parties after both parties have signed it and/or exchanged. A Deed is binding on the parties immediately upon signing by that particular party. This difference can be very important.
Had the documents been prepared properly, the both parties would have avoided the expense and inconvenience of a court battle.
Lena Banoob
Senior Associate
T: +61 2 9390 8308
E: lena.banoob@holmanwebb.com.au