Heads of agreements are similar to MOUs. Australian courts do not typically distinguish between them. The main difference is in the wording and that two parties typically sign a heads of agreement when they intend to form a legal agreement (a contract) at a later date. The heads of agreement lays out the bones of the contract, summarising the provisions that will be in the contract. The heads of agreement generally includes a date that the contract will be formed.
As stated above, in general neither heads of agreement nor MOUs are legally binding. However, and this is where things get a bit tricky, just because a document is called an MOU or a heads of agreement does not mean that it actually is.
What does that mean? Well, what the document actually says is much more important than what it is called. If a document puts obligations on the parties that both parties have signed, and there has been an exchange of consideration (for example, money), it might be a contract rather than an MOU or a heads of agreement. This would mean that a binding contract has arisen and if one party does not do what they have agreed to do under the MOU or heads of agreement then they can be sued by the other party.
It is important that heads of agreement and MOUs do not have obligatory statements such as “x agrees to do y” or “x shall do y”. Use a statement like “x may do y” instead. The heads of agreement or memoranda of understanding should also have a disclaimer statement such as “the parties do not intend for this [heads of agreement or MOU] to be legally binding”. But even this statement does not guarantee that that the memorandum of understanding or heads of agreement won’t be legally binding. You can see how tricky these things can get (and why we have a job!).
Heads of agreement and MOUs are useful when two parties:
- Are negotiating and want to keep a record of what they have agreed to so far
- Want to create a road-map for how negotiations will proceed
- Want to make it clear that what has been negotiated is not yet legally binding
- Want to deal with pre-contractual issues such as confidentiality, exclusivity and intellectual property
- Want to secure third party finance and need to demonstrate that a contract negotiation is underway
You need to consider what is right for you and your business and whether it is useful to put in place a Heads of Agreement or MOU. In our experience because an MOU or heads of agreement is not legally binding (generally speaking), in some situations it is better to just proceed straight to the contract.
Preliminary, non-binding agreements can be an unnecessary extra expense. For example, if you wanted to record how the parties anticipate a future transaction taking place and you are concerned about confidentiality, you might be better off putting in place a confidentiality agreement that has information about the future transaction in it as well. This way there is no doubt that the confidential information must be kept confidential and the future transaction also gets recorded.
As we like to say “Do it once and do it right!”