It is common for companies to sign deals and then announce them to the market. However, sometimes these are not deals at all but rather non-binding memoranda of understanding (MoU). Issuing press statements on the basis of a signed MoU can be a dangerous practice because they can “tip the market” when the underlying agreement may be changed or even revoked. Parties may suffer particular embarrassment when things fall through, whilst such announcements can also get a company into trouble. In Asia, publicity surrounding a signed MoU can be even more dangerous owing to the existence of complex cultural norms that foreign business people sometimes fail to grasp.
A case which serves to highlight the issue concerned a civil action brought against Australian mining company Fortescue Metals Group (FMG) by the Australian Securities and Investments Commission. In late 2004, FMG made two announcements that it had signed legally binding agreements with three Chinese companies, including a state-owned enterprise listed on the HKSE. The problem was that in reality those signed documents were not legally binding contracts but mere MoU, and were understood to be non-binding by a number of crucial Chinese witnesses. This case illustrates the need for a number of issues to be kept in mind when signing agreements of this nature.
Is the agreement legally binding or not?
Make it very clear on the face of the MoU whether you have an agreement or not – don’t leave this key aspect to guesswork. A simple clause stating that the agreement is ‘binding’ or ‘non-binding’ is usually sufficient. In some cases, it might be necessary to state that certain aspects of an otherwise non-binding agreement are binding, for instance, where a company wishes to include
binding non-compete, confidentiality or IP clauses.
Resist pressure to make a public statement.
In many cases, there is an urgent desire to make some form of public statement. Make sure that your company policy is clear as to whether public statements are made on the basis of a non-binding MoU. If so, it is essential that the people drafting the statement have the required training to accurately reflect the whole picture. The press release should very clearly state whether the agreement reached was an MoU or a definitive agreement, whether the terms are binding or non-binding, and whether the agreement is also subject to additional government approvals (which are very common in places like China and can typically derail an otherwise solid binding agreement).
Consider the cultural element.
Many Asian companies will regard a signed agreement as binding simply because it has come about from a series of negotiations and ‘handshakes’. This understanding could exist even where the document clearly states that a contract is legally non-binding. Culturally, it is often accepted that the agreement is binding but subject to ‘writing it up’, and the Asian business person might expect the deal to be ‘locked away’, a position typically based on the view that to materially change an agreement or back out of agreed positions would cause a party to ‘lose face’.
Consider using a terms sheet.
Where a MoU is designed to be binding it might be more appropriate to use the phrase ‘terms sheet’, which is typically used in situations where the parties have reached agreement on all material terms and have ‘agreed’ a deal subject to more detailed contracts being entered into.