How Binding And Enforceable Is A Memorandum Of Understanding? Supreme Court Weighs In
In the Supreme Court of Nigeria
Holden at Abuja
On Friday the 27th Day of January, 2017
Before Their Lordships
Walter Samuel Nkannu Onnoghen, Acting CJN
Mary Ukaego Peter-Odili
Kumai Bayang Aka’ahs
Kudirat Motonmori Olatokunbo Kekere-Ekun
Justices, Supreme Court
BPS Construction & Engineering Co. Ltd…………….. Appellant
Federal Capital Development Authority………….Respondent
Lead Judgement delivered by Kudirat Motonmori Olatokunbo Kekere-Ekun, JSC
The Appellant is a company registered in Nigeria and carrying on the business of civil, mechanical and electrical engineering and construction work. The respondent is the statutory body responsible for the orderly development and administration of the FCT, Abuja.
The Appellant approached the Respondent for the provision of infrastructural facilities at Mabushi and Katampe Districts of the Federal Capital Territory, Abuja. At a meeting held between the parties on the 6th day of July, 2004, the Appellant’s proposal was approved whereupon a Memorandum of Understanding (MoU) was drawn up and signed by the parties on the 13th day of July, 2004.
The MoU was made subject to signing a formal agreement by the parties. By the agreement, the Appellant, an infrastructure developer, would raise funds for the project and recoup the costs, from the collection of development levies payable by allottees of plots, and from the sale of vacant plots in the two districts. The terms of the MoU were to the effect that the Respondent would provide the Appellant with the engineering designs, drawings and bill of quantities (BOQ), and any other document that would enable the Appellant complete its costs analysis of the project.
The MoU also provided that within 14 days of its execution, the parties ‘shall enter into a formal agreement on terms to be mutually agreed between the parties’, in compliance of which the Respondent submitted the required documents to the Appellant.
The Appellant in turn submitted its Infrastructural Development Agreement to the Respondent for execution, along with evidence of its financial capacity to execute the contract. However, in spite of repeated reminders, the Respondent neglected, failed/refused to sign the agreement while the Appellant had incurred costs in terms of manpower and resources in the execution of the project based on “reliance on the promises, assurances and representations of the Respondent that a formal agreement will be executed in line with the MoU.”
Upon the persistent refusal by the Respondent to execute the formal agreement, the Appellant instituted an action at the High Court of the Federal Capital Territory, Abuja seeking, inter alia:
(a) A declaration that the Defendant (Respondent) is duty bound to enter into a formal agreement with the Plaintiff (Appellant) in line with the MoU;
(b) An Order compelling the Respondent to execute the formal agreement within a time stipulated by the Court;
(c) An Order for the Respondent to pay the sum of N3,877,284,858.29 being cumulative costs for the efforts, services and work input which the Appellant already committed to the said project pursuant to the MoU or in the alternative;
(d) An Order for the Respondent to pay to the Appellant the sum of N10,000,000,000.00 being loss of anticipated profit by the Plaintiff in respect of the project.
The Respondent denied the claims of the Appellant. At the end of the trial, the Court found for the Appellant and awarded the sum of N10,000,000.00 as damages for the breach of contract and N2,000,000.00 as costs and legal expenses in the action.
The Appellant was dissatisfied with the judgment and consequently, appealed against same to the Court of Appeal.
The Respondent was also dissatisfied with part of the judgement and accordingly, filed a notice of cross-appeal. At the Court of Appeal, the main appeal was dismissed while the cross-appeal was allowed and the awards of damages by the trial Court were set aside.
Displeased with the decision of the Court of Appeal, the Appellant further appealed to the Supreme Court.
Holding that the MoU was merely an invitation to treat, the Apex Court identified the major submission of Counsel for the Appellant to be that the MOU represented a binding and enforceable contract between the parties. Differentiating what constitutes a valid contract in contrast to an invitation to treat, their Lordships reffered to the case of BILANTE INTERNATIONAL LTD. v NDIC (2011) 15 NWLR (PT. 1270) 407 AT 423. and held that a binding contract must contain the basic elements of offer, acceptance, consideration and capacity to contract or intention to create legal relationship, as opposed to an invitation to treat which is not an offer that can be accepted to lead to a contract. For the parties, therefore, it held that the MoU was just a process in the journey to a contract and so the contract had not happened and so no specific performance or quantum meruit of damages could be ordered for a non-existent contract ‘not to talk of a breach thereof’.
Considering the definition of MoU as contained in the Black’s Law Dictionary, the Court held that a Memorandum of Understanding or letter of intent, merely sets down in writing what the parties intend will eventually form the basis of a formal contract between them. Thus, taking into consideration the elements of a valid contract, the MoU is merely a representation of the intention of the parties, subject to the execution of a formal agreement.
The Apex Court reiterated the elements of a valid contract and relied on the dictum of IGUH JSC in ALFOTRIN LTD. v A-G FEDERATION & ORS. (1996) 9 NWLR (PT. 475) 634 at 656 to the effect that for there to be an enforceable contract, “there must be a concluded bargain which has settled all essential conditions that are necessary to be settled and leaves no vital term or condition unsettled.” For the avoidance of doubt, paragraph 5 of the MOU states that “This memorandum of understanding is subject to the signing of a formal agreement by the parties.” In this instance, since the MOU is subject to signing a formal agreement, it would not be correct to say that the terms are to be construed in a mandatory sense. The third issue is to the effect that the Court of Appeal was wrong to have relied solely on the MOU in reaching the conclusion that there was no binding agreement between parties. On this issue, the Supreme Court held that where a contract is made subject to the fulfilment of certain terms and conditions, the contract is inchoate and not binding until those terms and conditions are fulfilled.
The Court also relied on the case of TRANS BRIDGE CO. LTD v SURVEY INTERNATIONAL LTD. (1986) 4 NWLR (PT. 37) 576 AT 617 on the essential requirements for the operation of Promissory Estoppel. At page 618 (supra), it was stated that the doctrine of Promissory Estoppel does not create a new cause of action but only prevents a party from insisting on his strict legal rights, when it would be unjust to allow him to enforce them, having regard to the dealings which have taken place between the parties.
The issue here is whether there were promises, assurances or representations made by the Respondent subsequent to the MOU which caused the Appellant to alter its position to its detriment, as found by the trial Judge. There was no evidence of modification of the agreement between the parties as contained in the MOU, which clearly stated that it was subject to signing a formal agreement by the parties. Therefore, though the Appellant had fulfilled its obligation under the MOU, such acts could not amount to a license to proceed to mobilise to the site and commit financial and manpower resources to the project, without the formal agreement being signed.
Representation: Chief Tochukwu Onwugbufor, SAN with H. Okhiria (Miss) and O. Onwugbufor (Miss) for the Appellant
M.N. Nunghe Esq. with Sylvester Ogbelu Esq., M.J. Numa Esq., E.O. Agi Esq. and M.T. Husseini Esq. for the Respondent
Reported by Optimum Publishers Limited (Publishers of Nigerian Monthly Law Reports (NMLR)