Non-Eforceability of Memorandum of Understanding & Exceptions thereto By Qosim A. Muhibudeen, SABUK

Memorandum of Understanding (MOU) is in itself not an enforceable contract. It is, by law, a preliminary negotiation upon which a definite future-reaching contract may or may not be birthed. To be enforceable, something more needs be done subject to the clause stated in the agreement. — Author

The position of the law is settled that not all agreements are enforceable contracts; even where all the ingredients of a valid and enforceable contract (which include offer, acceptance, and consideration) are present. A good example of this is an agreement with which offer, acceptance, and consideration have all been furnished but the subject matter of the contract is found to be illegal, immoral, or contrary to public policy. So also is the question of enforceability of MOU agreement, which would be given succinct explanation in subsequent paragraphs.

It has been a settled law that a Memorandum of Understanding, which, of course and tradition, predates a formal (not in its strict meaning of formal contracts) valid contract, is not an enforceable agreement. However, it is equally a principle of law that where there is a general rule, there will always be an exception. The question therefore goes thus: whether there is any exception as to the general rule on Memorandum of Understanding? And if yes, what are the exceptions? In answering the above poser, this legal bit publication shall be guided by a recent decision of the apex Court of Nigeria in the case of BPS Constr. and Engr. Co. Ltd. v. F.C.D.A. (2017) 10 NWLR (Pt. 1572) 1.

By way of introduction, the Appellant was the Plaintiff at the trial Court suing the Respondent as the Defendant. The Appellant appealed against the decision and also the Respondent cross-appealed to the Court of Appeal. The Cross-Appeal being allowed and the main appeal dismissed, the Appellant still further appealed to the Court of Appeal. The summary of the long fact leading to the decision of the apex Court was that the Appellant (a civil, mechanical, and electrical engineering and construction work Nigerian company) sought to enter into a contractual agreement with the Respondent (the body responsible for the orderly development and administration of the FCT) for the provision of infrastructural facilities at two Districts of the FCT. At their first meeting over considering the Appellant's proposal, the same was approved. A few days later, a memorandum of understanding was drawn up and signed between them.

The MOU requires, first, that the appellant raise funds for the project, which would be recouped through levies. And of course, this contention was countered by the Respondent's counsel. Resolving the contention of the parties, the Court's conclusion was predicated on the following findings:

A.  The contextual implication of MOU does not transcend it to an enforceable agreement

This argument is predicated on the construction of the definition of MOU as contained in the Black’s Law Dictionary, 8th edition, at pages 1006 and 924, which states that:

‘‘...business people typically mean not to be bound by letter of intent [used interchangeably for memorandum of understanding] and courts do not ordinarily enforce one, but occasionally find that commitment has been made.”

Placing emphasis on the underlined phrase in the above-given definition, the Appellant counsel advanced that MOU has an exception to the general rule of its non-enforceability in a circumstance where a court finds that a commitment has been made between the parties notwithstanding the general nature of a memorandum of understanding. The Court, however, noted that:

"[T]o be an enforceable contract, there must be a concluded bargain that has settled all essential conditions that are necessary to be settled and leaves no vital term or condition unsettled". In further discountenancing with the argument of the Appellant, the Court equally noted that: "...MOU also refers to the ‘project proposal’. In other words, it remains a proposal until a formal agreement is entered into and executed by the parties."

As per the nature of MOU agreements, there usually is an incorporation clause stating that parties shall enter into a formal agreement or reach a conclusion in respect of the subject matter of the MOU at a later date. Such was also incorporated in paragraph 5 of the exhibit relied upon by the Court, which provides that:

"That this memorandum of understanding is subject to the signing of a formal agreement by the parties."

Explaining the above, the Court reiterated that the general principle of law is that: "where a contract is made subject to the fulfillment of certain terms and conditions, the contract is inchoate and not binding until those terms and conditions are fulfilled".

B.  Commitment by one party cannot be an exception to the non-enforceability of MOU agreements.

As shown by the brief fact above, after the compliance with submissions of relevant documents by both the Appellant and the Respondent respectively, the Appellant while waiting for the Respondent to positively sign the second leg of the MOU (i.e., signing of a formal agreement in respect of the MOU), went ahead to hire manpower resources for the project. This was the basis for the reason advanced by the Appellant. The Court, however, in discountenancing with the above reason, held thus:

“…even if the appellant had fulfilled its obligations under the MOU by, inter alia, preparing a bill of quantities and providing evidence of its financial ability to execute the contract, such acts cannot amount to a license to proceed to mobilise to the site and commit financial and manpower resources to the project without the formal agreement being signed... Prudence dictates that for a project of this magnitude the appellant would have been patient enough to ensure that all these were dotted and the “t’s” crossed before mobilizing to site and incurring expenses in respect thereof."

This, the actual commitment to be relied upon for the enforceability of an MOU agreement, is the satisfaction of the clause upon which a final enforceable determination of the agreement is to be reached. While the Court held that MOU is a non-enforceable agreement, the Court further, in its decisions, reiterated the nature of a valid and enforceable contractual agreement.

In a coda, a sum up of the above findings and conclusions of the Court reiterates the position of the law on the status of the Memorandum of Understanding. A Memorandum of Understanding, by its nature, is just a mere invitation to treat (an exception to a valid offer), as it predates the actual formation of a valid and enforceable contract. It is akin to a prelude in drama performances. It has no legal life blown into it until a definite subsequent agreement is reached or the clause making it a future-reaching agreement is complied with. It lacks all the requirements of a valid offer, upon which other ingredients of a valid contract rest. 

Written by:

Qosim Muhibudeen (Senior Advocate of Bayero University, Kano), Director of Research and Litigation. He can be reached via: https://muhibqosim.com.ng  or 09063653547