What is a Memorandum of Understanding (MOU) or Heads of Agreement?

9 November, 2023 | Chantal Laidler

As a business owner or prospective business owner, you will often find yourself negotiating complex agreements, under tight timeframes. Whether you’re exploring new partnerships, joint ventures, or a potential purchase of a business, Memorandums of Understanding (MOUs) are a tool which can help you make these initial steps with confidence and secure understanding by both parties before reaching an agreement at a later stage.

Defining Memorandums of Understanding (MOU)
Let’s start by clarifying what Memorandum of Understandings are, and the purposes they serve.

A Memorandum of Understanding (MOU) is a formal written agreement between two or more parties that outlines the terms, conditions, and intentions of a collaborative or cooperative relationship. MOUs are commonly used in various business scenarios, including when parties are entering into negotiations or due diligence for a business purchase, partnerships, joint ventures, and agreements between companies and government agencies.

In New Zealand Memorandums of Understanding are also commonly known as Heads of Agreements, Letters of Intent or in some cases Term Sheets and are virtually interchangeable.

These documents are your allies in the early stages of negotiations and depending on how they are written, may be legally binding. MOUs provide a broad framework and express your preliminary intentions. They are a good tool to signal your commitment to exploring a potential business opportunity. MOUs are flexible and leave room for further negotiations but may also include detailed and specific terms you wish to agree at the outset of negotiations. Terms which may be included are the purchase price, conditions, settlement dates, confidentiality, any exclusivity period and obligations of each party.

Is A Memorandum Of Understanding Legally Binding?
Whether MOUs are legally binding really depends on the specific terms included, such as whether the parties set out a clear intention to be bound and the facts of each case – according to usual Contract Law rules of interpretation including whether there is sufficient certainty for each of these factors. This is why it is important for a lawyer to draft and review MOUs to ensure that they accurately reflect the intentions of the respective parties as to whether or not they intend the MOUs to be binding and whether the heads of agreement or MOUs can be enforced in the future.

The High Court has highlighted in their decision of Electrix Limited v Fletcher Construction Company Limited [2020], that even where MOUs are entered into, it is essential for the parties to subsequently enter into a formal contract or agreement – and an MOU will often confirm that any agreement will only binding when a formal agreement is entered into.

In any case, it is important to use best endeavours to honour the principles established in these documents and engage in good faith negotiations to maintain a positive business relationship.

What should be covered in a Memorandum of Understanding?
A typical MOU in New Zealand may include the following elements:

• Names and contact information of the parties involved.
• Purpose and objectives of the collaboration.
• Duration or term of the MOU.
• Roles and responsibilities of each party.
• Resources or contributions each party will provide.
• Dispute resolution mechanisms, if necessary.
• Termination clause outlining the time period for termination or conditions under which the MOU can be terminated.
• Confidentiality – define how confidential information should be handled and protected.
• Intellectual property – clarify ownership and usage rights.
• Signatures of the authorized representatives of each party.

 

Role in Due Diligence When Buying or Selling a Business
MOUs also play a crucial role in the due diligence process. When you’ve put your intentions and expectations in writing, it becomes easier to conduct a thorough examination of your proposed transaction.

MOUs may also cover the specific due diligence inquiries which parties wish to conduct – this can assist with the prompt gathering and provision of information. If an MOU is produced in anticipation of entering into an Agreement for Sale and Purchase for Business, often it leads to shorter condition timeframes as a number of matters have already been addressed.

 

Termination and Exit Strategies
Another vital aspect of a Memorandum of Understanding is to include a provision which relates to termination of any offer made and at which stage negotiations will cease. Any such clause needs to be carefully drafted to ensure clarity so that it explicitly outlines the circumstances under which either party can terminate negotiations or the agreement itself. This clarity helps prevent misunderstandings and disputes while providing a roadmap for an orderly exit if needed.

 

Why Use A Memorandum Of Understanding?
MOUs act as preliminary agreements that allow parties to work out key terms before entering into a more formal and legally binding contract, streamlining the negotiation process. They provide guidelines and protection while the finer details of the deal are being worked out.

 

Conclusion
In New Zealand’s business landscape, Memorandums of Understanding (MOUs) can be invaluable tools for you as you navigate and secure negotiations. These documents help clarify your intentions, expectations, and responsibilities, setting the stage for successful collaboration.

Whether you are a prospective purchaser or selling your business, consulting with an experienced commercial lawyer in New Zealand can help you draft MOUs that provide a solid foundation for the transaction and due diligence and help ensure your rights and interests are safeguarded throughout the negotiation process.

In the fast-paced world of business negotiations, time is of the essence. Don’t wait until the last moment to safeguard your interests and secure successful partnerships. Reach out to expert commercial lawyer, Chantal Laidler to harness her expertise and ensure your Memorandums of Understanding (MOUs) stand up to scrutiny. Act now to protect your business’s future.

Contact Chantal Today
Chantal Laidler
Chantal.laidler@Smithpartners.co.nz
09 836 0939