IS A MEMORANDUM OF UNDERSTANDING (MOU) A BINDING LEGAL CONTRACT?

1. It is a widespread practice for parties in business transactions to enter into a Memorandum of Understanding (MOU) after negotiations, without later drawing up and executing a comprehensive contractual agreement between them. In the event of a dispute, the question is whether or not the MOU constitutes a binding and enforceable legal contract. This issue came before the Supreme Court in the recent decision of BPS Construction & Engineering v Federal Capital Development Authority (2017). Facts of the Case

2. The facts of that case were as follows. BPS proposed and FCDA approved a plan for infrastructural facilities in the Federal Capital Territory and a Memorandum of Understanding (MOU) was signed by the parties. The MOU provided that within 14 days of its execution the parties shall enter into a formal agreement on terms to be agreed between them. BPS submitted the Infrastructural Development Agreement but FCDA did not sign the agreement. Meanwhile, BPS proceeded to incur expenses on the project.

3. As a result of the failure of FCDA to sign the formal agreement, BPS instituted an action at the High Court of the Federal Capital Territory, Abuja for inter alia; (i) a declaration that, in compliance with the MOU, FCDA was duty bound to enter into a formal agreement with them; (ii) an order compelling FCDA to execute the formal agreement with BPS; (iii) an order for FCDA to pay the sum of N3,875,284,858.29 for the works and services committed by BPS to the project. Counsel to BPS argued that the MOU represented a binding and enforceable contract between the parties. Decision of the Court

4. The lead judgment was delivered by Kekere-Ekun JSC who restated the basic elements of a binding contract as offer, acceptance, consideration, capacity to contract and intention to create a legal relationship. Her Lordship quoted with approval the dictum of Iguh JSC in Alfotrin Ltd v A.G Federation (1996) as follows, “To constitute a binding contract there must be an agreement in that the parties must be in consensus ad Idem with regard to the essential terms and conditions thereof; the parties must intend to create legal relations and the promise of each party, in a simple contract, not under seal, must be supported by consideration. There must be a concluded bargain which has settled all essential conditions that are necessary to be settled and leaves no vital term or condition unsettled.” See also Bilante International Ltd.v N.D.I.C (2011).

5. My Lord, after referring to the definition of a memorandum of understanding in Black’s Law Dictionary, said “From the above definition, it is clear that 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. It speaks to the future happening of a more formal relationship between the parties and the steps each party needs to take to bring that intention to reality. From the definition given above, (notwithstanding the signing of a memorandum of understanding) the parties thereto are not precluded from entering into negotiations with a third party on the same subject matter.” (underlining for emphasis)

6. Her Lordship agreed with the decision of the lower court (the Court of Appeal) which held as follows: “Since the MOU is not definite, but subject to the signing of a contract it is not an offer. For an offer to be capable of becoming binding on acceptance it must be definitely clear and final. A document which merely provides for signing of agreement in future does not amount to an offer. It is merely a preliminary move in the negotiation. At this stage when the terms and conditions of the agreement are not known and are not contained in the document so signed, it will be foolhardy for any party to claim that there is an offer and acceptance. In the instant case, Exhibit P5, the MOU does not qualify as an offer or an acceptance but an invitation to treat or negotiate.”

7. Also in Star Finance & Property v NDIC (2012), the Court of Appeal considered the legal status of a memorandum of understanding. The facts were that Metropolitan Bank and Star Finance signed a Memorandum of Understanding (MOU) by which Star Finance was to grant a lease of its property to the Bank. The Bank paid the sum of N250,000,000 as rent but did not take possession before its licence was revoked. The Nigerian Deposit Insurance Corporation (NDIC), as liquidator of the Bank, brought an action at the Federal High Court to recover the money paid as rent. The Court held that the Memorandum of Understanding was not a lease and since consideration had totally failed the NDIC was entitled to a refund of the rent.

Photo Credit: Gettyimages.com

Photo Credit: Gettyimages.com

8. In the lead judgment at the Court of Appeal, Okoro JCA (as he then was) said, “It is my understanding that such a document is usually referred to as a Memorandum of Understanding, ‘MOU’ for short. It is not the real agreement but a document guiding the future agreement. Its status is something less than a complete contract. See Black’s Law Dictionary 6th Edition P.984. The learned counsel for the Appellants (Star Finance) had urged this court in his argument to hold that the Memorandum of Understanding made by the parties herein on 13th May, 2002 was a lease known to law. He made the same submission at the court below and the learned trial Judge refused to accede to that submission in the following words:- “I disagree with the Defendants, certainly a Memorandum of Understanding cannot be seen to take the place of a formal lease. Let me say that the memorandum (MOU) does not take the place of a lease agreement.” Conclusion

9. Therefore, it is advisable for parties that enter into commercial transactions and seek to have a binding and enforceable contract not rely upon the MOU signed after negotiations but go further to prepare and execute a comprehensive legal agreement between them. • Jide Bodede LL.M(Lond). jide@lawfieldslawyers.com.