The Place of Understanding in Modern Commercial Transactions in Nigeria

Contributor: Sogo Emmanuel Clinton Esq.

INTRODUCTION

Over the years and even in recent times, when two or more persons decide to engage in a business venture and/or project together, they usually put pen to paper in a bid to protect their diverse interests, should any issue arise. To this end, parties usually enter into various forms of contract/agreement that will specifically spell out all the terms that will guide their actions.

It is on this note that parties usually enter into a Memorandum of Understanding, with the intent that same will be binding on parties in the likelihood of a breach. Albeit, Memorandum of Understanding has not lived up to the expectations of people that have adopted it as a document that will bind their dealings with one another, as the true essence of a Memorandum of Understanding has been misconceived by not only parties that employ it as the principal document that governs their contract, but also by lawyers alike, hence the need to set the records straight. This legal piece shall therefore address the legal strength of a Memorandum of Understanding, and how it affects commercial transactions in modern times.

DEFINITION OF MEMORANDUM OF UNDERSTANDING

The concept of a Memorandum of Understanding is essentially derived from two words namely, ‘Memorandum’ and ‘Understanding’

The Black’s Law Dictionary has also defined an MOU in the following words;

“A written statement detailing the preliminary understanding of parties who plan to enter into a contract or some other agreement; a noncommittal writing preliminary to a contract”.[1]

The Courts have also defined Memorandum of Understanding in HIGH PERFORMANCE DISTRIBUTION LTD. v. SAMSUNG ELECTRONICS COMPANY LTD & ANOR[2] as follows:

“…Of course, it is appreciated that a Memorandum of Understanding (M.O.U.), generally, is a prelude to contract, or letter of intent for parties to enter into a formal contract spelling out the basis for such relationship.”

From the above definitions, to put in simple terms, a Memorandum of Understanding is a statement of intent in white and black, for the purpose of entering into a contract in the near future, with respect to a particular venture or undertaking.

TYPES OF MEMORANDUMS OF UNDERSTANDING

In broad terms, there are two types of Memorandums of Understanding and they are Bilateral and Unilateral MOUs. We shall now proceed further to x-ray the meaning of the aforementioned.

BILATERAL MOU

As the name implies, it deals with a Memorandum of Understanding involving two parties and nothing more, except stated otherwise in the Memorandum of Understanding or same has been amended to accommodate more parties.

UNILATERAL MOU

On the other hand, this is the type of MOU that deals with more than two parties from the outset. This means that the MOU is drafted to cover the rights and liabilities of more than two persons.[3]

It is pertinent to note that the above types of MOU are not strictly specific as it deals with the categorization in broader terms.

PURPOSE OF MEMORANDUM OF UNDERSTANDING

Having understood the meaning and types of a Memorandum of Understanding, it is now sacrosanct now more than ever to know the purpose of same.

People enter into MOUs daily for different reasons, but we shall only focus on four (4) reasons that are predominant in every MOU, as follows;

a. It helps in surmounting the difficulties occasioned in repudiating a contract in the event that parties decide to not proceed with the venture.

b. To serve as a blueprint for future negotiations; parties will have a working document to avoid inconsistencies.

c. It helps to calm the mind of parties involved as it indicates the existence of mutually beneficial terms.

d. It is usually signed by the Executive of that particular company in a bid to allay the fears of parties involved.

LEGAL STRENGTH OF MEMORANDUM OF UNDERSTANDING

MOUs as discussed above are primarily agreements that state the intention to enter into a valid contract in the future and nothing more, but this is not the case now as the core purpose of MOUs has been misconstrued. People now enter into MOUs, and equally place same on the same pedestal as other contractual agreements. We shall now analyze and state the true position of MOUs as they should be in modern commercial transactions.

In explaining the position of the law as regards MOUs, it is pertinent that inference is drawn from the law, which is why we shall now look at the case of ABURIME & ANOR v. OSUNBOR[4] wherein the Court said the following words:

“It is trite that a Memorandum of Understanding is not an agreement yet. Memorandum of Understanding implies something less than a complete contract and it functions only as evidence of the contract and need not contain every term. Black’s Law Dictionary 6th Edition defines Memorandum as an informal record, note or instrument embodying something that the parties desire to fix in memory by the aid of written evidence, or that it serves as the basis of future formal contract or deed. A of Understanding is not the real agreement but a document guiding the future agreement. Its status is something less than a complete contract. SeeStar Finance & Property Ltd & Anor V. NDIC (2012) LPELR-8394 (CA). Having discovered that a Memorandum of Understanding is not a complete contract or an agreement, it presupposes that it cannot be placed on the same pedestal with an agreement or a contract. The implication is that its content cannot be enforced. Be that as it may, it remains a document which the parties can refer to for the purpose of reminding them of the content therein.”

The Courts have also expressed a similar position in STAR FINANCE & PROPERTY LTD. & ANOR v. NDIC[5] as thus:

“As I had expressed earlier, a Memorandum of Understanding cannot be anything more than a document which contains the preliminary understanding of parties willing to enter into a contract or an agreement subsequently based on those conditions contained in that document. That is my own understanding of the term “Memorandum of understanding.”

From the above definitions, it is glaring that a Memorandum of Understanding is not in the same realm like other contractual agreements, and such makes it unenforceable where there is a conflict between parties.

CONCLUSION

It is therefore advisable to avoid the use of Memorandum of Understanding as the only document that stipulates the rights and liabilities of parties in very complex commercial transactions. This is to avoid the issue of unenforceability that is associated with MOUs.

Conclusively, rather than an MOUs, parties should always resort to other forms of agreements that can be enforced when issues arise.

REFERENCE

  1. Ninth Edition
  2. (2021) LPELR-52708(CA)
  3. Katie Chan, ‘What is a Memorandum of Understanding (MOU) & Why Use One?’ https://www.kmblegal.com.au/what-is-a-memorandum-of-understanding#:~:text=There%20are%20two%20types%20of,between%20more%20than%20two%20parties. Accessed 23 July, 2022.
  4. (2022) LPELR-57590(CA)
  5. (2012) LPELR-8394(CA)

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