Parties negotiating prior to forming a contract often set down their general agreements regarding the transaction's terms in a document titled "Memorandum of Understanding" (MOU), noting that they will continue to negotiate. A recent court ruling indicates that even such a document may be considered a binding contract.
The legal significance of an MOU depends on the parties' intent, inferred from the totality of the circumstances, such as the document's wording, its content, and the parties' conduct. According to the Contracts Law (General Part), 5733-1973, deducing whether a contract is binding requires two main elements:
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Intent to be Bound (Gemirut Da'at): The parties have definitively made up their minds to enter into a contract and expressed their intent to be bound.
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Definiteness (Mesuyamut): The agreement is considered "sufficiently definite," meaning there is adequate specification of the transaction's essential terms.
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Note: In the context of real estate, there is an additional requirement that the agreement be in writing.
Regarding an MOU, the question arises whether it is a preliminary, non-binding document or a binding contract. Courts have ruled that, in addition to the above, the "connection formula" between the preliminary contract and the future contract must be examined to see if it indicates the parties viewed the preliminary contract as binding. It is customary to say that a connection formula stating the preliminary contract is "subject to a formal contract" indicates the parties viewed the MOU as an interim negotiation stage. Nevertheless, the parties' intent is not derived solely from the connection formula's wording, but also from the MOU's content and the parties' behavior before, during, and after the agreement.
In a recent Supreme Court case, the connection formula included text stating that a meeting would be held after signing the MOU to continue negotiations. The Court determined that while this text indicated the parties assumed a more comprehensive final agreement would be signed, the original document was nevertheless binding.
The Supreme Court ruled that it must be examined whether essential terms of the transaction remained unresolved, without which a binding agreement cannot be said to exist. For example, it should not be categorically determined that a payment date is always essential and that a lack of agreement on it indicates a lack of definiteness. Certain terms can be supplemented by law or custom, and sometimes these may be non-essential. The Court emphasized that details lacking agreement—and regarding which it is logical to conclude that had a dispute arisen over them, negotiations would not have matured into a contract—must be considered essential details.
Conclusion: It is impossible to know exactly which conditions will diminish the parties' intent to be bound and definiteness when drafting an MOU. Courts may view things differently depending on the circumstances of each individual case, making it important to consult a specialized lawyer even during the negotiation stage.