It is no gainsaying that ‘Memorandum of Understanding’ is a common document which many Nigerians including companies and organizations often use with a view to creating legal commitment and establishing official partnerships.
Of recent, a conclusion that Memorandum of Understanding is not the same as an agreement and not a binding document filled the air with heavy reliance on the holding of HIS LORDSHIP, Kudirat Motonmori Olatokunbo Kekere-Ekun, J.S.C in the case of BPS CONSTRUCTION AND ENGINEERING CO. LTD vs. FEDERAL CAPITAL DEVELOPMENT AUTHORITY (2017)10 NWLR (Part 1572)1 with little or no consideration for the facts of the said case leading to such decision. How true is this conclusion?
It is against this background that this piece is written to examine the correctness of the said conclusion or otherwise in the legal parlance and discuss when a ‘MEMORANDUM OF UNDERSTANDING becomes an enforceable and legally binding document in law
What then is the MEMORANDUM OF UNDERSTANDING?
Scouting for the meaning of the phrase ‘MEMORANDUM OF UNDERSTANDING’ prompted the writer to source for various definitions on the said phrase ‘MEMORANDUM OF UNDERSTANDING’
The meanings of the phrase ‘MEMORANDUM OF UNDERSTANDING’ sourced online go thus:
‘A memorandum of understanding is a type of agreement between two or more parties. It expresses a convergence of will between the parties, indicating an intended common line of action.’ Sourced from https//www.businessdictionary.com
‘Memorandum of Understanding is an agreement between two or more parties outlined in a formal document. It is not legally binding but signals the willingness of the parties to move forward with a contract.’ Sourced from https://www.investopedia.com
‘Memorandum of Understanding is a document that records the details of an agreement between two companies or organizations which has not yet been legally approved.’ Sourced from https://dictionary.cambridge.org
‘A Memorandum of Understanding is an agreement between two parties, usually two companies, outlining the rights and responsibilities each has for a particular venture or project. It is intentionally vague and is usually the first step toward a full contract.’ Sourced from https://financial.dictionary.thefreedictionary.com
Recourse to Black’s Law Dictionary, 8th edition at page 1006 for the definition of MEMORANDUM OF UNDERSTANDING evinced a further direction to the definition of ‘LETTER OF INTENT’ which is found at page 924 thereof and states thus:
‘Letter of intent: A written statement detailing the preliminary understanding of parties who plan to enter into a contract or some other agreement.’
It is to be noted that the word ‘memorandum’ is defined at page 984 of the same Black’s Law Dictionary as ‘an information, record, note or instrument embodying something that the parties desire to fix in memory by the aid of written evidence, or that is to serve as the basis of a future formal contract or deed.’
Flowing from the above various definitions of the phrase ‘MEMORANDUM OF UNDERSTANDING’ is the inferential fact that a memorandum of understanding though is an agreement; it is not legally binding. Hence, it expresses a convergence of will between the parties and signals the willingness of the parties to move forward with a contract.
With the clause ‘it is not legally binding or it has not yet been legally approved’ which featured in the above quoted definitions, one may be tempted to rush to a conclusion that a memorandum of understanding is not a legally binding agreement and backed up one’s conclusion with the decision of court in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A.
It is pertinently important to make it known that definitions on a thing in a book or online are opinions of some persons on that thing though our judges often resort to definitions to arrive at their own decisions in determining dispute between parties before them as the trial judge did in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A. and got approval by HIS LORDSHIP, Justice Kekere-Ekun, JSC at page 29 paragraphs G-H in the following words:
‘…the lower court, by its finding above has demonstrated a clear understanding of the import of exhibit P5. Whichever definition is relied upon, the end result is the same.’
It is thus submitted that flowing from the approval of the reasoning of the trial court hinged on the definition of ‘memorandum of understanding’ sourced from Black’s Law Dictionary for its finding is an indisputable fact that the trial court resorted to the said definition for a clear understanding of the import of memorandum of understanding admitted in evidence as exhibit p5.
It is the writer’s stand that the holding of the trial court at page 28 that ‘a memorandum of understanding or a letter of intent means a written statement detailing the preliminary understanding of parties who plan to enter into a contract or some other agreement’ should not be stretched beyond to conclude that a memorandum of understanding is not the same as agreement and it is not legally binding. This kind of conclusion is nothing but misapplication of the law.
It is however worth saying at this juncture that a memorandum of understanding which contains a commitment is binding and enforceable between parties as opposed to a memorandum which has no element of commitment and cannot effectuate a binding and enforceable contract between parties.
It is the writer’s advice that where parties are desirous of creating a legal commitment, or establishing official partnerships or entering into an enforceable contract via a memorandum of understanding; the required legal elements (the so-called ‘four corners’) for a valid and enforceable contract must be well-defined and captured in the said document i.e. MEMORANDUM OF UNDERSTANDING to constitute a binding contract. The required elements are offer and acceptance, consideration and the intention to be legally bound (animus contrahendi).
It is the writer’s further stand in a clear term that for a memorandum of understanding to be legally operative, it must:
- identify the contracting parties
- spell out the subject matter of the agreement and its objectives
- summarize the essential terms of the agreement, and
- be signed by the contracting parties
- devoid of a clause subjecting it to the execution of a formal agreement
It is the writer’s stand that much as there is no law which makes a memorandum of understanding a non-binding document simply because a document is referred to as memorandum of understanding; the reliance on the holding of Per Kekere-Ekun, JSC in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A to conclude that a memorandum of understanding is not the same as agreement is a gross misapplication of the law because the said case is only an authority for what the court decided on in the said case. Fortifying the writer’s stand is the case of Adedara v. Arowolo (2014) All FWLR (Part 761) 1536@1558 paragraphs C-D
It is fundamentally important to note that not only that the memorandum of understanding (exhibit p5) which the Apex Court considered in reaching such decision in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A has no element of commitment and did not effectuate a binding and enforceable contract between the parties, the said memorandum of understanding also contains a clause stating that ‘within 14 days of the execution of this memorandum of understanding the parties hereto shall enter into a formal agreement with respect to the project/proposal on terms to be mutually agreed’ and a clause stating that the said memorandum of understanding is subject to the signing of a formal agreement by the parties. Hence, these clauses form the springboard and basis for the holding of the Apex court in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A that notwithstanding the signing the said memorandum of understanding, the parties are not precluded from entering into negotiations with a third party on the same subject matter.
It is to be noted further that the purport of the memorandum of understanding considered in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A was just for a representation of the intention of the parties, subject to the execution of a formal agreement and used to express a convergence of will between parties, indicating an intended common line of action and making a general conclusion that memorandum of understanding is not the same as agreement is a misapplication and misconception of the law established in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A.
It is the writer’s stand that it is an erroneous conclusion for anyone to hold on to the view that ‘memorandum of understanding’ is not an agreement and has no legal effect simply because of the holding of the Apex court in the case of BPS Constr.& Engr. Co. Ltd. v. F.C.D.A wherein the consideration of the court was a memorandum of understanding which was just a representation of the parties who did not intend any legal commitment nor create a legally enforceable agreement.
It is hereby further advised that a care must be taken by both the parties and their counsel in ensuring that a memorandum of understanding adequately expresses intention of parties thereto and the basic elements of a binding contract must be put into consideration where intention of the parties is to create a legally enforceable agreement.
It is the writer’s final recommendation and advice that before any inference is to be drawn from any decided case, efforts must be made to reading and understanding the facts leading to the decision which one wants to rely on for any opinion as doing so would avert quoting principle from a case out of context and misapplying the said principle. Always bear in mind that a case is authority only for what it decided.
SOURCE: The Nigeria Lawyer – https://thenigerialawyer.com/when-a-mememorandum-of-understanding-becomes-an-agreement-enforceable-in-law/