It is commonplace for the parties in a commercial deal to sign preliminary documents to record their “in principle” agreement and to confirm the actions and steps for concluding the deal. Such a document is known by a variety of names, the most common of which are “letter of intent”, “memorandum of understanding” and “heads of agreement”.
From the lawyer’s perspective, the legal effect of a document – namely, whether it is legally binding on the parties – is more important than the name that it has been given.
There are many cases in which courts have decided that a document titled an “agreement” or a “contract” has no legal effect; similarly, there are many cases in which courts have decided that a document titled a “letter of intent” or a “memorandum of understanding” has legal effect. Ultimately, the question as to whether a document has legal effect will be determined by the principles of contract law and the result may, of course, differ depending on the relevant jurisdiction.
In this article, I will consider two issues: (1) the traditional distinctions between the use of these names; and (2) how the legal effect of preliminary documents is determined from a common law perspective and a Chinese law perspective.
The traditional distinctions
Most, if not all, joint ventures in China commence with the parties negotiating and signing a “letter of intent” or a “memorandum of understanding”. In general, these names are used interchangeably and the question of which name is used depends solely on the preference of the parties. The PRC Equity Joint Venture Law does not make specific reference to either of these documents. Instead, it refers to a “joint venture agreement” and a “joint venture contract” as two documents that must be submitted to the examination and approval authority, together with other documents such as the articles of association. Article 10 of the Equity Joint Venture Law Implementing Regulations defines a “joint venture agreement” and a “joint venture contract” as follows:
Article 10
“The joint venture agreement referred to in these Regulations refers to a document entered into by the joint venture parties after reaching unanimous agreement in relation to the main points and principles for establishing the joint venture enterprise; the joint venture contract refers to a document entered into by the joint venture parties after reaching unanimous agreement in relation to their mutual rights and obligations…”
Interestingly, most parties to a joint venture do not sign a document called a “joint venture agreement”. Instead, the letter of intent or memorandum of understanding takes the place of the joint venture agreement for the purpose of obtaining the approval of the approval authority. This demonstrates that the name of the document does not matter to the approval authorities, as long as it contains the main points and principles for establishing the joint venture enterprise. Let’s now look at the traditional distinctions between the three terms.
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Andrew Godwin
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.
