Posted by : junaiding Jumat, 22 November 2013
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Memorandum of Understanding (MoU)
Memorandum of Understanding. Letter of Intent (LoI). Head of Agreement. Protocol. Letter of Understanding. etc.
Words and phrases above looks almost similar. Although it has little difference between the one with the other, but in general we can say it have the same intent and purpose. And among of all, the MoU and LoI is the most popular.
The MOU and LOI are often used by the business person, whether in a national and international business scale. Beside it, the MoU also made between the subjects of international law like State.
For business people who have small business, this LoI and MoU does not look so important. But for companies that have large business scale, the existence of the MoU and the LoI to be very important.
Few illustrations. if you are going to invest in Indonesia, and making a partnership between foreign companies and companies in Indonesia. lets say in the form of joint venture (JV). Since the beginning of the negotiations, until resulted the contract that is final and ready to be implemented, it would take a very long time, could be months or even years. During the negotiations process related to the general and detail aspect, the business conditions in the world often be change, and that can be affect to the decisions is need to be taken by the each party. In addition, during the preparation of the contract which will be final, we known lack of time to make the process of Due Diligence by each party to the business partner. Well, the early entire process (pre-contract processes) need to be made a points as the frame of mind of together, so that there are any standards is will be guide to the direction and goals is want to reach together, to draw up the final contract. In this case, the MoU is needed or can be in the other form such as LoI.
The next question is, what is the MoU?. It is a binding or non-binding to each party?. Here we will review some of the reference of MoU is existing in other countries. Because if you are going to make a MoU with your business partner from other countries, could have been a different understanding of the MoU between there and here, it will not affect anything if there is no conflict, but if there is a problem it will be more complicated even the systemic impact.
Definition of Memorandum of Understanding (MoU)
There are various definitions about meaning of the MoU, let's look at some of them:
Christine Rossini, says: “Memorandum of understanding (MOU) (US) / head of agreement (UK) a preliminary document containing some terms of an anticipated agreement and signed by the parties”.
Gene K. Landy, says “Memorandum of Understanding or ‘MOU’. The term ‘memorandum’ means a record and ‘understanding’ mean agreement; so an MOU is a record of an agreement – in other words, MOU means ‘contract’”.
According to Salim HS, "Memorandum of understanding is the basis for preparing the contract in the future based on the results of agreement by the parties', either written or oral”.
Munir Fuady say "A preliminary agreement, in the sense that, will be followed by and will be outlined in another agreement that set up to be more detail, because it's in the memorandum of understanding only contains the key and general things. As for the other aspects of the memorandum of understanding is relatively same with the other treaties”.
Andrei Dontsov, et al. stated “In a memorandum of understanding, the parties define the target shares, the contracting persons, the time of completion of the due diligence process, the timing for agreeing the definitive documentation, etc.”
The Binding of Memorandum of Understanding (MoU)
Gene K. Landy says “in other words, MOU means ‘contract.’ (Sometimes, we hear the redundant term “Binding MOU.”) MOU documents are always binding agreements.”. Beside it Chistine Rossini says “Memorandum of understanding (MOU) (US) / head of agreement (UK) a preliminary document containing some terms of an anticipated agreement and signed by the parties. This type of document is usually nonbinding and imposes the obligation merely to continue negotiating”.
There are many other opinions that say binding and non-binding. If seen differences in the legal systems of each country that is what distinguishes the opinion of each other.
Such as in Russia, the MoU could binding, and may also not binding. Andrei Dontsov, et al. Say “Under Russian civile law, a memorandum of understanding may be binding or non-binding. A binding memorandum of understanding is a preliminary agreement (‘predvaritelny dogovor’) under which the parties engage to enter into a future agreement, on the terms set out in the preliminary agreement, on the transfer of assets, shares, or participation interests, or on the provision of services”.
Beat Brechbühl, and Robert J. Wooder, also argues that the MoU generally have no binding force, it's just have a stong psychological effect, but in the opinion that there are a few things contained in the MoU is still has legal effect, is more detai they said:
“The LoI or MoU will be agreed by the same parties who will later enter into the participation agreement and will set out the major terms of agreement reached at such stage – these documents are not ordinarily legally binding. Despite this, these agreements can have a stong psychological effect on later contractual negotiation. Such non-binding provisions are:
- Valuation of the company (which is important for the subscription price);
- Future legal form of the target company;
- Major privileges and preferences of the investor;
- Proposal for the composition of management and supervisory board;
- Exit strategy.
Although the LoI or MoU is non-binding in general, the parties usually give legal affect to several provision of the LoI or MoU. Such normally binding provision are:
- Exclusivity for a certain period (usually one or two months);
- Procedures for the exercise of due diligence;
- Costs and expenses.”
Additionally, Afifah Kusumadara have a notion that in civil law countries generally admited the nature of the contractual or binding of the LoI and MoU, although in the LoI and MoU is not explicitly written binding on the parties. Courts in civil law countries consider elements "intent or wish" of the parties, and not the explicit words to determine the nature of a contractual of LoI and MoU. Unlike the case in common law countries which adopted the principle that the content of the LoI and MoU does not have the binding force of the party, except in the LoI and MoU written sentences or clause that explicitly states that the LoI and MoU was binding for the party.
MoU in Indonesia based on the Civil Code
Many peoples say the binding of MoU based on the condition of validity a contract (Article 1320 Civil Code) and the principle of freedom of contract (Article 1338 Civil Code). the condition of validity a contract contained in Article 1320 Civil Code: “In order to be valid, an agreement must satisfy the following four conditions:
- There must be consent of the individuals who are bound thereby;
- There must be capacity to conclude an agreement;
- There must be a specific subject;
- There must be an admissible cause”.
Then the principle of freedom of contract are contained in the Civil Code Article 1338 : “All legally executed agreements shall bind the individuals who have concluded them by law. They cannot be revoked otherwise than by mutual agreement, or pursuant to reasons which are legally declared to be sufficient. They shall be executed in good faith”.
So if a MoU was made by both parties, with qualifies acordance validity a contract related to the Civil Code article 1320, the MoU is legally binding to both parties.
In my opinion, the MoU was basically non-binding. Because the MOU is likened to some kind of clue to lead to a goal that will be binding on both parties. So MoU can not be equated with the Contract.
In a contract there are three (3) phases. The first phase is Pre-Contract. Second is contract. And last is Post-Contract. In the final contracts, acts or deeds done in the third phase will be regulated distinctly, and that is binding by both parties. While the MoU is in Pre-contract phase.
But the reality in practice is very difficult to make MoU is just a pure MoU. I mean is, in practice we often found the contents of a MoU like an contract. So, the parties and some people considered legally binding like a contract.
This kind of thing could not be denied, considering good will always be neighbors with the bad will. And bad will can occur not only because there are any intention of evil doer, but also because of the opportunity and situation, so it needed a commitment with accompanied by sanctions, and not just morally sanctions, but distinct sanctions, so the bad will does not affect to the neighbors. Because there are some things that really need to stated by explicit and be an binding for the parties in the preparation of the MoU. For example, as the points in the opinion of Brechbühl Beat, and Robert J. Wooder above, ie: the obligations of the parties to keep the information and documents that are exchanged; time and expenses is incurred during the negotiation; how to do the due diligence process; and priority rights of the parties in the process of negotiation rather than a third party; as well as the obligations of the parties to negotiate in good faith.
Therefore, could have an MoU include the points that are non-binding and legally binding. Or there are also those who dont want to apply the MoU as a binding agreement as a whole by giving emphasis on the title "Non-Binding Memorandum of Understanding", or stating it in the first or last article about not legally binding of the provisions contained in the MoU.
If it's going to combine the provisions is binding and non-binding in a MoU, it should to stated explicitly in a particular article, and other thing is very important point is to notice the writing of each article by article in the MoU. For example, in the article intended to bind the parties it must use words or phrases that are commonly used in the "Agreement". Vice versa in the article or clause is not intended to bind do not use the word or phrase that are commonly used in the "Agreement".
Then, how the difference between the words in the form of the Agreement or not. The following example (which is written in brackets "()" are binding or the words that are commonly used in the "Agreement"):
- The Parties “should” (“Shall”);
- ... would constitute an “understanding” (“agreement”);
- ... which would “come into effect” (“into force”);
- ... stated they “intend” (“undertake” or “agree”);
- ... MoU was “dated” (“done”).
Finally, for the parties is will make the MoU, should consult to the respective legal advisors. Each state may have different kind and different legal effects to the MoU, as well as every legal counsel or lawyer may have a different opinion related to the MoU. So, the consideration and understanding, needed to take decision when you want to make the MoU.
 Author, is the owner and author of all articles in this blog. Graduated from the Faculty of Law, University of Hasanuddin, Makassar, Indonesia. And now works as an "Advocate".
 Christine Rossini, “English As a Legal Language”, (London: Kluwer Law International Ltd., 1998), P. 14.
 Gene K. Landy, “The IT/digital Legal Companion: A Comperhensive Business Guide to Software, Internet and IP Law”, (USA: Syngress Publishing, Inc., 2008), P. 188.
 Undergraduate thesis of Adawiah Benny La Tanrang, Title “Kekuatan Hukum Memorandum of Understanding (MoU) Dalam Penerapannya Berdasarkan KUH Perdata”. Can acsess by Online at: http://repository.unhas.ac.id/handle/123456789/6357.
 Andrei Dontsov, et al. “Russian Business Law: The Current Issues”, (Moscow, Russian Federation: Clifford Chance CIS Ltd., 2009), P. 16.
 Beat Brechbühl, and Robert J. Wooder, (Global Venture Capital Transactions: A Practical Approach”, (The Netherlands: Kluwer Law International, 2004), P. 154.
 Afifah Kusumadara, “Kontrak Bisnis Internasional: Elemen-Elemen Penting Dalam Penyusunannya”, (Jakarta: Sinar Grafika, 2013), P. 199-200.
 Beat Brechbühl, and Robert J. Wooder, Op., Cit.,. Also look, Afifah Kusumadara, Op., Cit., P. 200.
 Anneliese Quast Mertsch, “Provisionally Applied Treaties: Their Binding Force and Legal Nature”, (Leiden, The Netherlands: Koninklijke Brill NV, 2012), P. 218.; Also Look, Afifah Kusumadara, Op., Cit., P. 201.