A Memorandum of Understanding or letter of intent is usually
defined as an agreement between two parties in the form of a legal
document that expresses the willingness of both parties to do
business or enter into a merger. It indicates that a partnership, a
merger or an acquisition between companies is being considered
seriously and that both the parties wish to have further
discussions before entering into a contractual agreement.
The Memorandum is aimed at promoting good standards of
cooperation between the parties, indicating an intended common line
of action and setting out a framework to facilitate liaison on
areas of mutual interest. It also clarifies respective roles and
responsibilities and outlines mechanisms in place to promote
effective liaison relationships.
Although a Memorandum of Understanding does not necessarily
imply a legal commitment and lacks the binding power of a contract,
it is a more formal choice to a gentlemen's agreement, which
relies upon the honour of the parties for its fulfilment, and is
The question of whether such documents are in fact legally
binding on the parties under English or Italian Law can only be
answered by looking at its content in more detail.
The fact that the parties to the future agreement often are of
different nationalities makes it impossible to provide a general
answer without giving a brief overview of the legal position under
civil law and common law.
Pre-contractual responsibility in civil and common law
Italian law does not recognise legal structures in the course of
the negotiations preliminary to a contract which can be totally
assimilated to the Memorandum of Understanding as defined by Common
law; what normally happens is that the parties sign a preliminary
contract whereby they assume the obligation to complete the
transaction at a later date; this document is a binding contract in
its own right and its breach gives rise to contractual
Under English law on the other hand, these type of documents are
considered non binding unless they include the material terms of
the agreement. For the purposes of clarity, it is usual to
introduce phrases such as "subject to contract" as the
definition of a document as memorandum or letter of intent will not
necessarily guarantee its non binding nature.
Italian law also provides that the simple use of the term letter
of intent is not sufficient to prevent the document from creating
legal obligations. Article 1337 of the Italian Civil Code regulates
pre-contractual responsibility and affords that in all preliminary
stages of the transaction the parties must act in good faith and
cannot withdraw arbitrarily or unjustly from the transaction. The
duties of information, clarity and confidentiality are also part of
pre-contractual responsibility and may give rise to the obligation
to pay damages if breached.
This concept is interpreted differently in common law legal
systems, where it is subordinated to the necessity of protecting
the freedom of contract, although it is increasingly common to find
liability during the pre-contractual stages and documents have to
be drafted with care to avoid this result.
Coming back to Italian law then it is possible that a letter of
intent or memorandum of understanding will give rise to liability
to damages and will be considered legally binding in respect of the
main duties comprised in the concept of good faith, such as
information, clarity and confidentiality. Provided the letter of
intent does not contain all the agreed principles and material
terms of the contract, and can therefore be properly defined as
pre-contractual letter of intent, the above are the only
obligations arising from the document under Italian law.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
In a recently released milestone decision, the Swiss Federal Supreme Court held, for the very first time, that the duty of financial intermediaries to report suspicions of money laundering...
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).