The Dangers of a Memoranda of Agreement
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Written on 28 October 2014
There has been much debate on the subject of whether Heads of
Terms or ‘Memoranda of Agreement’ (MoA), are binding on the parties. A
MoA is seen as a precursor to entering into a more formal agreement,
and much rather seen to be a mere statement of commercial intent of
entering a contract.
However, whatever the intent may be, a MoA, if not carefully
drafted, can expose the involved parties to inadvertent liabilities,
effectively making it a binding agreement. A recent case quite clearly
demonstrates the issues in much greater detail: Unaoil Limited
v Leighton Offshore Pte Limited  EWHC 2965 (Comm) (12 September
This case involved an oil company Leighton Offshore who were
approached by Unaoil for a large oil infrastructure project in Iraq.
Unaoil intended to team up with Leighton to increase their chances for
a successful bid on the project. Both parties then entered into a MoA,
setting out that Leighton would sub-contract some of the project work
to Unaoil, setting out the payment terms, including explicitly stating
that Leighton would pay a non-refundable advance of $12.5mto Unaoil. It
also contained a liquidated damages clause of $40m.
After a relationship breakdown, though Leighton proceeded
alone and won tendering for the contract, they refused to engage Unaoil
as sub-contractor as per the MoA. Subsequently, Unaoil sued Leighton
for breach of the MoA for $82.5m on the grounds of the $12.5m
non-refundable advance, $40m liquidated damages alongside $30m loss of
The question therefore arises whether the liquidated damages
clause amounts to an unenforceable penalty.
The Court thus held that the MoA was “very badly drafted” and
that the dispute in actual fact arose due to the poor drafting of the
agreement. As a result, the Court largely relied on witness statements
and thus awarded Unaoil the non-refundable advance debt of $12.5 m and
a further $5.8m in loss of profits.
This case serves as a reminder to contracting parties that
they should not enter into a MoA, or any other agreement, without
paying careful attention to the terms within it.
Additionally, it is wise not to assume that a MoA has no
contractual liability even where it is mislabelled as “non-binding”.
Written by Murshida Khan, a
graduate student of Law
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Article Published/Sorted/Amended on Scopulus 2014-11-06 10:05:23 in Legal Articles