The tip

  • Be wary of including clauses in memorandums of understanding (MOU) that only require parties to negotiate a formal agreement, as such an obligation may not be enforceable.
  • Obligations to use 'best endeavours' to reach an agreement, or to negotiate an agreement 'in good faith', have no independent legal content within the framework of an MOU and are unlikely to be enforced by a court.
  • If you are preparing an MOU and the goal is to formalise the steps to be taken by parties leading up to the signing of an agreement, you should include precise obligations against which you (and a court) can measure compliance or non-compliance. 

Example: exclusivity clauses which proscribe parties from negotiating with bid competitors can be one of several effective mechanisms to enhance the prospects of entering into an agreement. Combine this measure with a complement of other prescriptive benchmarks, including cost, time and confidentially requirements, and you are much more likely to create a framework of binding obligations from which parties may not deviate on the road to contract execution.

The recent case

The recent decision handed down by the Supreme Court of Queensland in Baldwin & Anor v Icon Energy & Anor [2015] QSC 12 concerned an MOU under which the parties had agreed to negotiate a gas supply agreement (GSA).  The defendants – who were the prospective suppliers of gas – allegedly failed to negotiate as required by the MOU and no GSA was concluded. The plaintiffs claimed approximately $274 million in damages for lost opportunity.

The defendants applied to strike out the claim arguing that the plaintiffs' pleadings disclosed no reasonable cause of action.

The key issue was whether clauses in the MOU requiring the parties to negotiate in good faith and use reasonable endeavours to negotiate a gas supply agreement were enforceable. The argument of the defendants centred on the fact that the clauses were uncertain because they had no legal content, and could therefore not be enforced.

This position was accepted by McMurdo J, who held that standards of reasonableness and good faith cannot be measured by a court unless there is a framework of rights or obligation (such as a pre-existing contract) by which that standard can be anchored. Accordingly, the claims were struck out.

The only dimension of the MOU which was sufficiently certain was an exclusivity clause with respect to the negotiations.  It appears that this requirement was enforceable because it clearly stipulated proscribed conduct and non-compliance could be easily measured.  However, as no loss or damage claimed by the plaintiff attached to this dimension of the claim, the Court determined to strike out the entire statement of claim.