Lessons from Sundorne Products v Geminor
The recent case of Sundorne Products v Geminor is a further reminder that, in certain circumstances, a memorandum of understanding can lead to legally binding obligations arising, even if the parties were intending for a later, formal agreement to be put in place.
Background to the case
An MOU was drawn up by the parties in relation to submitting a joint tender to a council for waste haulage and treatment services; the MOU did not state that it was not legally binding or that negotiations were subject to contract and the MOU said that it would stay in force until a formal consortium agreement was in place or the parties agreed to terminate. No formal agreement was concluded by the parties.
Sundorne submitted a tender bid to the relevant council which was accepted and Sundorne then entered into a formal contract with the council and the parties started to provide the services in accordance with the MOU. The parties later fell out and it was held that Sundorne were entitled to damages of some £800,000 from Geminor, who later wrongfully ceased to provide services to Sundorne.
Decision of the court
The court examined the factual background and decided that the parties had concluded a legally binding agreement comprising the MOU and a number of associated letters; in particular, the court noted that the parties had proceeded with the services described in the MOU and that no grounds for termination had arisen – the judge stated that the MOU was “…not just a stepping stone on the way to a future contract; it actually constituted a contract in and of itself”.
Key takeaways
Names and labels are not important
Just because a document is called an “MOU” or “letter of intent” is not decisive as to whether or not there is a legally binding agreement in place – to avoid being bound, it is vital that either the document states that it is not legally binding or a phrase such as “subject to contract” is used;
Performance may change the legal position
As soon as the parties start to perform services, there is an increased risk that the MOU/preliminary agreement will be seen as legally binding and govern the services provided – this carries the risk that the terms in the preliminary agreement are not sufficiently comprehensive to cover all relevant issues, such as limitation of liability or termination rights;
Courts are keen to find that a legal relationship was intended
Here, the court easily found that this was the case due to the parties’ conduct in performing/receiving services coupled with their correspondence and the fact that the MOU was expressed to survive until a formal agreement was in place;
Is 1 agreement better than 2?
Consider carefully whether it makes business sense to delay the commencement of services in order to agree a comprehensive legally binding agreement rather than starting off with an MOU/preliminary agreement and later having to negotiate a second agreement – having to deal with 2 agreements may well take longer overall and there is still the risk that the initial, preliminary agreement is seen as legally binding whether or not that was the parties’ intention;
Get the MOU/preliminary agreement right
If it is intended to be legally binding, it is important to have clear terms specifying if some or all terms are legally binding: issues that are often binding include confidentiality, exclusivity, termination rights, the consequences of termination and limitation of liability;
Use an entire agreement clause
It is also vital that the second, formal agreement has a clear entire agreement clause making it clear that once it is executed it will replace and supersede the earlier MOU/preliminary agreement.
