MOUS AND THE MYTH OF AGREEMENT: WHEN A DEAL ISN’T A DEAL:
In the fast-paced world of commerce, timing is everything. Businesses often find themselves under pressure to record the basic terms of a deal quickly, prior to the finer details being ironed out. In these instances, a Memorandum of Understanding (MOU) is often drafted as a stopgap, and is intended to capture the essence of an anticipated agreement. But how much legal weight does such a document carry? Can a party rely on a MOU to enforce a contract that has not yet fully materialised? The answers lie in the foundational principles of contract law, and the often-misunderstood concept of an “agreement to agree.”
To understand the legal status of an MOU, we need to consider the founding principles of contract law. At the heart of every valid and binding contract lies two key components: a clear and unequivocal offer, and an acceptance that mirrors that offer. These foundational elements ensure that the parties reach true consensus on the essential terms of their agreement. Whilst there are a number of formalities that need to be complied with in this regard, the focus in this particular article is that each party must agree on the same thing in the same sense (consensus ad idem), and the terms must be clear and definite. The principle of certainty is critical to contract formation. If a document lacks essential terms or defers same to future negotiation, it fails to meet this requirement. This is the fundamental flaw in most MOUs - they are often too vague to be enforced, no matter how well-intentioned. In other words, for a contract to be valid, its terms must be clear, ascertainable, and complete. Uncertainty strikes at the very heart of the concept of “offer,” because one cannot accept an offer that is vague, incomplete, or conditional upon future negotiations.
In the real world, however, agreements are not always formalised with legal precision from the outset. It is common for parties to conclude a MOU that outlines the broad terms of a future agreement, leaving finer details for later negotiation. This often results in what is known as an agreement to agree - where the parties express an intention to conclude a contract in the future, but without firm commitments in place.
Under South African contract law, such agreements to agree are generally unenforceable. This position was firmly established in Premier, Free State v Firechem Free State (Pty) Ltd 2000 (4) SA 413 (SCA), where the Supreme Court of Appeal held that agreements to agree are not enforceable because of the absolute discretion vested in parties to agree to disagree. Holding parties to an undertaking to negotiate a contract would effectively undermine this discretion, as it would impose a duty to reach consensus where none exists. This would be contrary to the foundational principle that consensus, freely and clearly expressed, is the cornerstone of any enforceable contract.
Notwithstanding this traditional stance, South African courts have gradually opened the door to alternative interpretations, particularly where the agreement includes mechanisms to resolve deadlocks or obligations to negotiate in good faith. In Southernport Developments (Pty) Ltd v Transnet Ltd 2005 (2) SA 202 (SCA), the court recognised that an agreement to agree could be enforceable if a “deadlock-breaking mechanism” is included. For example, referral to arbitration or expert determination can provide sufficient certainty to salvage the agreement. This principle was echoed in Roazar CC v The Falls Supermarket CC 2018 (3) SA 76 (SCA), where the court reiterated that agreements to agree are unenforceable unless the uncertainty is removed through a clear dispute resolution mechanism.
A potentially transformative shift came from the Constitutional Court in Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC). In this case, while the court declined to enforce the agreement, it made important obiter remarks suggesting that, where a contract includes an express obligation to negotiate, the parties may be held to a standard of reasonableness and good faith. The Court emphasised that constitutional values, such as fairness, ubuntu, and good faith, could guide the interpretation and enforcement of contractual obligations. It implied that courts might, in the future, be willing to enforce obligations to negotiate where parties have contractually bound themselves to do so. In this context, the standard of arbitrio boni viri, a principle requiring the exercise of discretion by a reasonable and honest person, may become relevant. The implication is that parties should not only engage in negotiations, but do so reasonably, purposefully, and in good faith. However, it is essential to note that no case has been decided on the Everfresh principle, and thus, the manner in which it will be applied by the courts, if at all, is up for judicial interpretation and discretion.
While the traditional South African position remains that agreements to agree are unenforceable due to uncertainty and discretion, the legal landscape is not entirely static. Courts have shown a willingness to entertain enforceability where clear mechanisms exist to address uncertainty, or where constitutional values point to a duty to negotiate in good faith. Commercial parties should therefore exercise caution when drafting MOUs or similar documents. If the intention is to create binding legal obligations, the agreement must include essential terms, deadlock-resolution provisions, and, where appropriate, a clearly defined duty to negotiate. Without these, a MOU may end up being nothing more than an expression of intent, with no legal teeth.
Written by Alexis van Eeghem
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