Have you ever entered into a Heads of Agreement (HOA) or a Memorandum of Understanding (MOU)? Did it work out the way you planned?

One of my former colleagues had a very strong opinion on these documents. He said to me once:

“You are better off just doing a finger-painting together”

Now this sounds like an absurd statement at first. But when you think about it, it really isn’t.

Why?

Well, without trying to offend anyone, business people, particularly executives, love MOUs and HOAs and primarily enter into them for one of two reasons:

  • They’ve got a consensus on some major terms and want to negotiate the other terms and conditions later- the “half-cocked agreement”; or

  • They want their stakeholders to know they’re doing important things- “showing off”.

So, what’s wrong with that?

Sometimes agreements to agree are ok, like Agreements to Lease- where they also attach the full lease. This is because they are essentially a complete agreement, just that one party doesn’t have the ability to enter into the end agreement yet. But this article isn’t really about those agreements.

What this article concerns are MOUs and HOAs, which are almost always incomplete in some way.  Where all the terms haven’t quite been negotiated yet. But think, what if one of those terms turns out to be a deal breaker?

The problem is they often don’t have the detail to be fully enforceable or, if they do, the parties might not think they’re enforceable. And then, are they enforceable to the extent the final agreement would be, or only enforceable to make the parties try to come to a final agreement?  Messy, isn’t it?

Now, if you just want to show off, a collaborative finger-painting would do the trick. Everyone, including your stakeholders, can see that you’re collaborating. And you’ve then got something to frame. And you don’t run the risk of being sued over an agreement that you thought was non-binding.

On the other hand, if it’s a half-cocked agreement you’re after, then it’s probably a half-cocked agreement you’ll get. Which is about as clear and enforceable as a joint finger-painting, but not as pretty. It also runs the risk of being costly as your litigation lawyer argues that it is unenforceable; or sort-of enforceable; or completely enforceable even though you thought it wasn’t. Personally, I don’t mind. But you might. And your CFO or bank manager probably will.

So, should collaborative finger paintings take over the executive suite?

Probably not. But I’d suggest thinking twice about entering into a HOA or MOU and instead consider this:

  • If you’re worried that consensus on the major terms might change: record offers and counter-offers in writing and finish the negotiations. But remember; a deal isn’t agreed until it’s completely agreed- you may not have negotiated all the deal-breakers yet.

  • Only execute the agreement once it is completely, and properly, formalised.

  • If you feel you absolutely need a MOU or HOA, get a lawyer to do it.

  • And if you’re having trouble formalising a deal with the other party, then think hard about if this is a party you want to deal with.

To discuss this article or any of your business’ legal needs, feel free to speak with the author:

Daniel Roach, Director

droach@roachcorporatelaw.com

+61 401 976 449

This article is commentary only, is general in nature and cannot be regarded as legal advice. It may not be suitable for your particular circumstances. You should not rely on the contents of this article without consulting us first.

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