What is a Memorandum of Understanding in a Joint Venture in England?

If you are in the early stages of negotiating a joint venture (JV) with another commercial entity, you may have come across the term ‘memorandum of understanding’. This article will explain:

• the purpose of a memorandum of understanding;
• the legal implications behind a memorandum; and 
• some common commercial matters addressed by memoranda of understanding. 

Memorandum of Understanding vs Joint Venture Agreements 

A memorandum of understanding is considered one of a few preliminary documents that parties to a JV commonly negotiate. In other words, a memorandum of understanding will usually be negotiated and drafted before the joint venture agreement is exchanged.

You might hear others refer to letters of intent or heads of terms. In practice, these documents serve the same function as a memorandum of understanding. 

Purpose of a Memorandum of Understanding

The general purpose of a memorandum of understanding is to set out key points of the JV. They are not necessary for all JV negotiations, but they are particularly important where the JV may be quite complex or have an international component. 

More specifically, a JV memorandum of understanding can help the parties:

• establish the key principles of the JV; 
• demonstrate the seriousness of the parties’ commitment to the deal; 
• disclose the substance of the JV to the public; 
• outline how parties can navigate certain regulatory requirements such as competition disclosures; 
• set out a general framework and timeline for the key stages of the JV; and
• aid the legal teams to the parties in drafting the definitive joint venture agreement. 

Legal Effect of the Memorandum of Understanding

One of the most fundamental questions related to memoranda of understanding is whether any of the contents are legally binding on the parties. Thus, if one of the parties does not comply with a “term”, can the other party ask a court (or other body) to force the offending party to adhere to the term or pay damages in lieu?

As with all transaction documents, the answer depends on how the parties draft the memorandum. However, as a matter of commercial best practice, memoranda of understanding do not generally have any legal effect. Since parties broadly draft the terms, there can be further negotiation before the parties sign the final agreement. Ultimately, it is the formal agreement that should have legal effect. Consequently, a court may refuse to uphold a term because it does not have sufficient legal certainty. 

If parties do not take care, a memorandum of understanding may create legal obligations. Hence, before signing, you should always have a qualified solicitor draft and review your memorandum of understanding. 

Furthermore, the memo can include confidentiality obligations. Parties might draft the memo to bind parties to these obligations. However, best practice dictates that all parties sign a separate non-disclosure and confidentiality agreement to ensure maximum effect. 

Moral Impact of the Memorandum of Understanding

It may not make sense to the layperson why two parties would want to sign a non-binding agreement. But in addition to having certain practical benefits, a signed memorandum of understanding tends to create what lawyers call moral force. 

Moral force, while not creating strictly legal obligations between the parties to the memo, tends to be sufficiently solemn to compel the parties to continue good-faith negotiations. In other words, if one party to the memorandum of understanding abandoned negotiations without reasonable cause, this would reflect poorly on them and may impede their future prospects. 

Principal Issues Commonly Contained in a Memorandum of Understanding

We will now consider some key matters that a memorandum of understanding usually addresses.

Parties to the JV

The memo will commonly specify which parties will form the JV. While this might be quite apparent from the outset, this can be useful if the JV involves certain business divisions of a large enterprise.

Purpose and Scope 

The memo will also provide a general overview of the purpose of the JV and its timeline.

The memo might clarify the purpose and scope in different places throughout the document. 

Structure 

It is beneficial for the JV to record the structure of the memo. The most common structures include a:

• purely contractual arrangement; 
• general partnership (or limited partnership); 
• limited liability partnership (“LLPs”); and 
• limited company (also called a “joint venture company”). 

Contributions 

The memo will often contain an overview of how much each party will contribute to the JV. For instance, if the parties agree that the JV will be a limited company. Therefore, this section might specify that Party A will receive 500 ordinary shares in exchange for £1m, and Party B will receive 1,000 ordinary shares in exchange for £2m.

Additional Matters

Other important terms that the memo will include:

• any conditions that must be fulfilled for the JV to commence;
• certain accounting matters;
• who will manage the JV and to what extent the JV will employ others;
• if any dividends will be paid and, if so, on what terms;
• the terms in which you can transfer shares or interest in the JV to third parties;
• how to resolve deadlocks and disputes; 
• when the parties are entitled to exit negotiations without liability;
• the options available if there is a breach of the joint venture agreement after commencement; and
• any matters contained in the memo that the parties intend to create binding obligations. 

Key Takeaways 

In the context of a joint venture (JV), a memorandum of understanding sets out the general terms of the JV but does not obligate either party to these terms. Memoranda of understanding allow parties to finalise more detailed terms in the negotiation process. In general, a memorandum of understanding will not create a legal effect. However, certain provisions may have a legal effect. Hence, a competent lawyer should draft and review any memorandum of understanding to ensure that you are not inadvertently creating legal obligations detrimental to your position. 

If you need help negotiating the terms of a JV on behalf of your business, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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