Memorandum of understanding

How BC law treats it

An MOU, like a letter of intent or term sheet, is often used to set out the commercial deal before lawyers draft a definitive agreement. Calling a document an MOU does not make it non-binding. Courts in BC follow the objective approach: they ask whether a reasonable person would conclude from the words and conduct that the parties intended to be legally bound, and whether the essential terms are sufficiently certain to enforce. Bawitko Investments Ltd v Kernels Popcorn Ltd (1991), 79 DLR (4th) 97 (Ont CA) is widely cited for the point that where parties intend their agreement to be subject to a formal contract with further essential terms, there may be no binding contract until that document is signed. An MOU can therefore be wholly binding, wholly non-binding or partly binding. A common structure makes the commercial terms non-binding while making confidentiality, exclusivity, cost sharing, governing law and termination clauses binding. An agreement to agree on essential terms in future is generally unenforceable. An MOU signed electronically can be binding, since the Electronic Transactions Act, SBC 2001, c 10 generally allows electronic signatures and records to satisfy legal requirements.

What it means for your business

MOUs move deals forward and let parties test whether a transaction is worth pursuing. The risk runs both ways: a party may be held to terms it thought were tentative, or may discover that the exclusivity or confidentiality protection it relied on is unenforceable. Before signing, BC business owners should decide what must bind now, say so expressly, and avoid conduct, such as partial performance, that suggests a final deal. Example: A Vancouver tech company and a Calgary distributor sign an MOU on pricing and territory. The MOU says only the confidentiality and 60 day exclusivity clauses are binding, so when talks fail neither side can enforce the pricing terms.

Risks and common mistakes

Assuming an MOU is automatically non-binding because of its title. Failing to state which clauses are binding and which are not. Starting to perform the deal before the definitive agreement is signed, which can suggest the parties intended to be bound. Leaving the binding exclusivity or confidentiality clauses without a clear duration. Omitting governing law and dispute resolution terms for cross border MOUs.