Five Tips To Take Your Relationship to the Next Level: Preliminary Agreements

Are you (or your clients) working on the early stages of a business relationship?  Are you still at the dating stage, or do you want to make it monogamous or more committed?  If so, I recommend you document it.  What that document looks like, or what you call it, is usually of no real consequence, but there are 5 key things you should bear in mind when writing one. 

1 Don’t judge an agreement by its cover

There are many names for agreements used at this stage in a business relationship to name a few Letter of Intent (LOI), Memorandum of Understanding (MOU) and Heads of Agreement (HoA).  No matter what you call them, when it comes to preparing such agreements, the focus should be on substance rather than form. Personally, I like “MOU” as it signifies there is alignment between the parties.

2 Keep It Simple, Stupid

It is easy to fill a draft MOU with words that have no clear meaning to make it sound important. It is better to pin down the purpose of the MOU and to use 'less is more' approach with clear and concise drafting.  Too much content can have unintended consequences.  Whoever drafts the MOU should aim to clearly capture and reflect the expectations of the parties in case one party (or a judge) ever has to second guess unexpressed intentions.

3 This is not the wedding

Don’t let the MOU morph into a large legal document. Take care to avoid the negotiation becoming a full dress rehearsal for the drafting of the final agreement. When too much of the detail piles into an MOU there will always be a risk of stalling on key points. Before you know it, the MOU will contain too much information, cannot be finalised and signed, and you are instead into the 'main' negotiation for the deal.

4 To commit or not to commit, that is the question

An important part of the MOU is where you record the status of your business relationship. Being clear about whether you are committing to legally binding obligations is a must.  Where the parties have stayed silent on the status, trying to work out what was intended in the future can wind up being a subjective exercise carried out by someone who was not involved at the time. The conduct of the parties both before and after the signing of the MOU can also confuse the position.

There's really no doubt that taking the time to spell out what is binding and what is not binding is a simple solution. Some parts of the MOU may be binding (generally what you have agreed so far) and other parts may not be. It may be that a final agreement will be entered into upon those yet to be decided parts being nailed down.  If you ever went to Court to enforce an MOU, the inclusion of clear evidence of an intention to be legally bound by it would normally result in the Court striving to give effect to your intention, rather than taking a more neutral approach.

5. When will it be time to move on?

How long are you prepared to wait for the final agreement to be decided? There may be a risk of you being left hanging, if the parties fail to fulfil conditions or to agree on any final terms to be negotiated.   Best practice is to include a timetable in the MOU, plus a provision for the MOU to end by a certain date to ensure that it does not stay around indefinitely.