Increasingly I am asked by negotiating parties to get a Memorandum of Understanding or Heads of Agreement, as some sort of half-way house between negotiations and a final sale agreement or other commercial contract.  My usual question is, “Why bother?”

This may sound harsh, but the point is that most of the content of a Memorandum of Understanding (“MoU”) or a Heads of Agreement (“HoA”) is unenforceable, so why spend time and money on them?  Why not just go straight to the main agreement?

The MoU and HoA are relatively recent inventions that have crept into the chain of documents.  Parties are increasingly asking for them and lawyers are increasingly having to draft them. 

Commercially, people don’t seem to distinguish between an MoU and HoA.  The case law doesn’t really distinguish between the two things either. They are part of a family of preliminary documents that share some common characteristics:

• They record the parties’ current intentions and the steps along the way to a completed contract
• They are largely non-binding, except where they expressly set out binding conditions such as confidentiality, exclusive dealing
• They record how the parties intend to agree certain things along the way to an agreement
• The record the matters that are yet to be agreed.

If you had to distinguish between an MoU and HoA, the clues are in the words themselves:

• A “memorandum” of “understanding” is simply a document recording the understanding of the parties, in the sense that it is at this stage just an understanding, not an agreement where everyone agrees to be bound.
• A “heads” of “agreement” is a document that sets out the main heads of an agreement that has already been concluded where everyone agrees to be bound.  This is usually just a preliminary agreement in that you agree on certain things (price, confidentiality, exclusive negotiations, timing of due diligence etc) and that you will  have a formal agreement if everything proceeds according to plan.

When to Use an MoU or HoA

Going by the analysis above, you would use an MoU when you have an understanding, but no concluded agreements on the points being discussed.  You would use HoA when you have some agreement on some of the points and want a roadmap for getting to a full contract.

Why You Would Use an MoU or HoA

Given that neither the MoU or the HoA is strictly necessary, there are nevertheless a number of reasons why you might want to use one or the other as a preliminary step along the way:

• When the other side wants one and it is commercially desirable to keep them happy
• When you think the other side has a propensity for re-opening points you thought you had agreed, so you want to capture all the points of agreed in negotiations to date and also set out a road map for how things are to proceed and by when
• When you want to be clear that nothing said to date is going to bind you unless and until there is a full written contract signed by all the parties
• When you want to have a document that can be used to give clear written instructions to a lawyer for the final  agreement
• When you want to give an indication of price, terms etc. whilst still allowing for that to be changed after due diligence
• When you want to record what you understand is of the arrangements to date, subject to whatever the lawyers are going to put in the final agreement about representations and warranties
• Where one side or the other needs finance and that finance is dependent giving a bank at least an indication that a deal is in the offing
• When you or the other side is starting to get deal fatigue and you want something in writing quickly even though it is well before contracts are going to be ready.

Conclusion

MoUs and HoAs have crept into the series of documents that people assume are needed to reach an agreement.  Hardly anyone knows the difference between them.  If you feel that any of the reasons outlined above apply to your situation, then by all means, go ahead and use one.  If, however, you want to save legal costs, consider going straight to the full agreement.

Disclaimer: I shouldn’t really have to write a disclaimer here about using this as legal advice as I am sure you are smart enough to work out that it is general commentary only and it may not suit your own personal circumstances.