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Individual Assignment 3

What is Memorandum of Understanding? It is a legal contract? If not, what it is?


In my understanding, Memorandum of Undertaking (MOU) is a document that listed all the
agreement between two parties which is not legally binding. There are situations that when
parties are carrying on negotiations and they are reach to the position to make further
discussion to enter into contract, then the outline that outcome from the negotiations that had
been execute can be in the form of MOU.
However, mere existence of a document with respect to understanding reached
between the parties does not necessarily lead to the conclusion that such document is a
contract.1 In the case of Milner v Percy Bilton2, the term "understanding" was held to mean
"something quite different from a binding legal contract; at utmost the word connotes a
gentleman's agreement". Therefore, MOU cannot be said as a legal contract because it is not
binding and more to an outline of a contract. By referring to section 2(g) of the Contract Act
1950, an agreement enforceable by law is a contract. It means that, even though MOU is an
agreement made by two parties, only a document or agreement that enforce by law can be
said as legal contract and it is binding to the parties that enter to the contract. In addition,
when an agreement is made subject to contract or subject to the preparation and approval
of a formal contract and similar expression, it is generally construed to mean that the parties
are still in a state of negotiations and do not intend to be bound until and unless a formal
contract is exchanged.3 In the case of Tai Tong Realty Co. (Pte) Ltd v Galstaun & Anor 4
stated a very strict interpretation of the words subject to contract and these cases have held
that the intention of the parties were legally binding contracts only came into existence upon
the execution of formal contracts.
Thus, MOU is only a conditional agreement made by the parties that agreed in negotiating
without creating any right or obligation towards the agreement. Lastly, in the case of Lim

Memorandum of Understanding: Legal Nature and Drafting,


http://www.worldpetroleumlaw.com/images/legal_nature_drafting.pdf , page 1.
2

[(1966) 2 All E.R. 894]

S. Santhana Dass, Generaln Principles of Malaysian Contract Law, Marsden Law Book
Sdn Bhd, page 36.
4

[1973] 2 MLJ 95

Hong Liang v Tan Kim Lan,5 the Court held that the MOU which was subject to a formal
contract to be executed by the parties after finalizing the terms and conditions was not
binding until such time that the formal contract was executed. The MOU was an agreement
to contract or an agreement to negotiate.

[1997] 5 MLJ 157