Posted on Jan 20, 2015 by Lanneau Wm. Lambert, Jr.
Can a city change its mind about development partners after signing a memorandum of understanding (MOU)?
That question bounced around in South Carolina courts for a decade, and the state Supreme Court issued the final answer last summer. A city – or any party – may back out of an “understanding” that doesn’t include a definitive agreement.
That’s good news for cities and governmental agencies that often use MOUs, but subsequently determine that unanticipated costs or political considerations alter plans for development or construction projects.
The issue came up between the city of Columbia and the firms that were initially under consideration for design, development and construction of a publicly-funded hotel adjacent to the Columbia Metropolitan Convention Center. The city and the firms signed a MOU in 2003, and the design firm was paid $650,000 for interim architectural design. But, after estimated costs for the overall project rose, the city issued a new request for proposals in 2004, and selected other firms that went on to successfully develop the hotel.
The initial group of firms was unhappy not to be included in the project after being a part of it in early planning and discussions. They sued the city, claiming that the MOU constituted an implied contract for the entire project. One central element to the design firm’s claim was that it was paid for its early work on the project, which, it said, was evidence of an implied contract. The plaintiffs also said the city had received benefits from their initial involvement.
Agreeing to agree is not a contract
The court sided with the city in an emphatic ruling that said the MOU was not a binding contract, but was, instead, “a nonbinding agreement to agree in the future.” In case there was any doubt about what “agreeing to agree” means, the court added that this MOU “is unambiguously not an enforceable contract.”
The decision turned mostly on the absence of any clearly expressed long-term commitments in the MOU, as well as a clause that pointed out that some fees would be based on undetermined costs. The court cited case law that said, in order for a contract to be binding, it cannot leave open some terms for future negotiation.
The court also was not impressed with the idea that the city received “benefits” from the early working relationship, noting that “any dealing with other professionals is educational,” especially in the context of business negotiations.
The South Carolina Supreme Court has given us more clear direction by assuring us that MOUs don’t have implied or assumed commitments. A MOU in South Carolina means exactly what it says – nothing more and nothing less.
Lanneau Wm. Lambert, Jr. is a shareholder at Turner Padget in Columbia, S.C., where he serves clients, including cities and government entities, in business transaction matters, including contracts, leases and commercial real estate finance and development. He may be reached at (803) 227-4248 or by email at email@example.com.