The Dangers of a Memoranda of Agreement

There has been much debate on the subject of whether Heads of Terms or ‘Memoranda of Agreement’ (MoA), are binding on the parties. A MoA is seen as a precursor to entering into a more formal agreement, and much rather seen to be a mere statement of commercial intent of entering a contract.

However, whatever the intent may be, a MoA, if not carefully drafted, can expose the involved parties to inadvertent liabilities, effectively making it a binding agreement. A recent case quite clearly demonstrates the issues in much greater detail:Â Unaoil Limited v Leighton Offshore Pte Limited [2014] EWHC 2965 (Comm) (12 September 2014).

This case involved an oil company Leighton Offshore who were approached by Unaoil for a large oil infrastructure project in Iraq. Unaoil intended to team up with Leighton to increase their chances for a successful bid on the project. Both parties then entered into a MoA, setting out that Leighton would sub-contract some of the project work to Unaoil, setting out the payment terms, including explicitly stating that Leighton would pay a non-refundable advance of $12.5mto Unaoil. It also contained a liquidated damages clause of $40m.

After a relationship breakdown, though Leighton proceeded alone and won tendering for the contract, they refused to engage Unaoil as sub-contractor as per the MoA. Subsequently, Unaoil sued Leighton for breach of the MoA for $82.5m on the grounds of the $12.5m non-refundable advance, $40m liquidated damages alongside $30m loss of profits.

The question therefore arises whether the liquidated damages clause amounts to an unenforceable penalty.

The Court thus held that the MoA was “very badly drafted” and that the dispute in actual fact arose due to the poor drafting of the agreement. As a result, the Court largely relied on witness statements and thus awarded Unaoil the non-refundable advance debt of $12.5 m and a further $5.8m in loss of profits.

This case serves as a reminder to contracting parties that they should not enter into a MoA, or any other agreement, without paying careful attention to the terms within it.

Additionally, it is wise not to assume that a MoA has no contractual liability even where it is mislabelled as “non-binding”.

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