In recent times, many persons have been bothered about whether or not the capturing of their agreements or contractual arrangements in a document headed or tagged “Memorandum of Understanding” (MOU) would create a binding obligation which can be enforced if breached. This short write up seeks to address this conundrum in the simplest and shortest way possible.
Does an MOU create a Binding Agreement?
Under Nigerian Contract law, certain elements must be present in an accord or arrangement for it to constitute a binding and enforceable contract. These elements are as follows:
1. An Offer: For a Contract to be validly created between two or more parties, there must be a proposal of terms presented by one or more of the parties for the other to accede to. This proposal is referred to as an Offer and it must be positive, direct and unambiguous so that the party or parties to whom it is presented are capable of understanding the terms proposed to them and therefore capable of accepting them; this brings us to the next element.
2. Acceptance: this is where the party or parties to whom an offer has been made agrees to or accedes to that offer. Upon this agreement, that party is deemed to have accepted the terms proposed and agrees to be bound or obligated by them.
3. Consideration: This simply means what one party is giving or has agreed to give in return for what the other party is giving or has agreed to give. For instance in a sale of goods contract, the purchase price a buyer is paying is his consideration in return for the goods the seller is transferring. The purchase price is the buyer’s consideration while the goods being transferred is the Seller’s consideration.
Consideration need not always be monetary or indeed tangible. It can be a forbearance, an undertaking or whatever valuable and adequate recompense in exchange for what the other party is offering. But Consideration must not be vague, it must be clearly ascertainable from the parties agreement.
4. Capacity to Contract: Under Nigerian law save for some exceptions, only persons who are of contractual age and mental capacity are legally recognized as able to enter into a valid contract. Except for some variances in respective State Contract Laws, the contractual age in Nigeria is 21 years, any person below 21 is deemed a minor who is unable to enter intro a contract for himself/herself except through his/her guardian or next friend who is of contractual age.
5. Intention to enter into legal relations: It must be clear from the parties’ agreement that they intend to be bound by the terms of the agreement either immediately, at a certain date or upon the occurrence of a contingency or event. Furthermore, a mere social or domestic arrangement may not pass for a valid contract if it is not clear that the parties intended to be obligated by the terms of their arrangement.
Where all of the foregoing elements are present in any arrangement, written or unwritten, same amounts to a valid contract which is binding on the parties and enforceable.
Thus, where parties enter into any arrangement in which all the foregoing elements are present and they decide to document this arrangement and tag it an MoU or any name whatsoever, it does not change the character of that arrangement as it remains a valid and binding contract.
Many non-lawyers always mention that from their search on google, they have read legal articles wherein it was opined that MoUs do not create binding and enforceable contracts in Nigeria. This is very incorrect. Perhaps these articles misconceived the decision of the Nigerian Supreme Court in BPS CONSTRUCTION & ENGINEERING COMPANY LIMITED v. FEDERAL CAPITAL DEVELOPMENT AUTHORITY (2017) LPELR-42516(SC).
In that case, a party had entered into a MoU with another party wherein both parties stated that the terms of the MoU would be “subject to contract“. Now this means that the terms of the MoU would only become binding on the parties when they execute in a formal Contract. The Supreme Court therefore held that given the way the MoU in that case was couched, same did not create a binding and enforceable contract between the parties as the parties clearly intended only to be bound by its terms upon executing a formal contract which was never done. This clearly affected the required contractual element of ‘Intention to enter into legal relations‘ as discussed above.
It is clear that the Supreme Court decided as it did based on the peculiar facts and terms of that particular MoU which was in dispute between the parties in that case. The Supreme Court did not in any way make any blanket decision or one-size-fits-all pronouncement that an MoU cannot create a binding and enforceable contract or agreement. Indeed, under Nigerian Law, a pronouncement or decision of a Court in one case can only be relied on in the context of the peculiar facts and law that was decided in that case. A Court’s decision in one case cannot be stretched across board to apply to other cases with dissimilar or different facts.
Therefore, where a MOU fulfills all the 5 contractual requirements discussed above, it suffices as a valid and binding Contract/Agreement which is enforceable by the parties.
Written by Nelson Onuoha Esq.