Commercial Contracts • 2026

The Memorandum of Understanding: When It Binds and When It Does Not

A practical guide to drafting a Saudi memorandum of understanding that protects both parties and cleanly separates the binding clauses from the non-binding ones.

Reviewed by a licensed Saudi lawyer Updated 1 October 2026 5 min read

A memorandum of understanding is the document two parties sign at the start of their negotiations to record what they have agreed in principle and what they intend to negotiate later. Many business owners assume that labeling the document non-binding automatically frees them from any obligation, and that is a dangerous misreading. Under Saudi law what matters is not the heading on the page but the intention of the parties and the substance of what they actually agreed.

With the Civil Transactions Law taking effect in December 2023, the principle of good faith in negotiating and performing contracts is now expressly embedded in Saudi law. This means that an MOU, even if it does not create an obligation to conclude the final contract, may give rise to liability against a party who negotiates in bad faith or walks away abruptly after the other side has incurred significant costs in reliance on a serious expectation.

Template C-10 (Memorandum of Understanding) is designed to draw a clear line between the non-binding part, namely the intention to enter into a later contract, and the clauses that should always be binding such as confidentiality, exclusivity, governing law, competent court, and the bearing of costs. That separation is the heart of a sound MOU.

Get the C-10 MOU Template

When an MOU Turns Into a Binding Contract

An MOU becomes binding despite being labeled non-binding when the elements of a contract are complete within it: a meeting of minds on a defined subject and a lawful cause, with no essential terms left for later agreement. If the memorandum precisely fixes price, quantity, term, and core obligations, a judge may treat it as a complete contract regardless of its title.

Complete elements: a final agreement on every essential matter, not made contingent on a later agreement.
Mandatory wording: using terms like shall, undertakes, and must instead of intends, hopes, and seeks.
Commencement of performance: one party actually beginning to perform its obligations or receiving consideration, signaling an intent to be bound.
Absence of a final-contract condition: failing to state expressly that no obligation arises until a separate later contract is signed.

The Clauses That Should Always Stay Binding

Even in the most cautious MOU there are clauses that make no sense to leave non-binding, because they are the real protection during the negotiation phase. Make these clauses expressly binding and separate them from the non-binding part.

Confidentiality: protecting all financial, commercial, and technical information exchanged during negotiations, even if no final contract is concluded.
Exclusivity: a commitment by both parties not to negotiate with a competitor during a defined period, which gives the negotiations genuine seriousness.
Governing law and competent venue: stating that the memorandum is governed by the laws of the Kingdom of Saudi Arabia and subject to its courts or a specified arbitration center.
Costs: specifying who bears the expenses of study, due diligence, and advisory work, to avoid a dispute if the deal collapses.

Good Faith in Negotiations Under the Civil Transactions Law

The Civil Transactions Law, in force since December 2023, has established good faith as a general rule of dealing that extends to the pre-contract negotiation phase. A party who enters serious negotiations and then breaks them off without justification, or negotiates with no genuine intention to contract, or conceals material information, may be held answerable for the harm the other party suffers as a result.

The point here is not to force a party to conclude the contract, since the freedom not to contract remains intact, but to compensate for harm caused by bad-faith negotiation. It is therefore advisable for the MOU to state expressly that each party is free to withdraw from negotiations in good faith and without liability, while the binding clauses continue to apply.

A Ready Binding-vs-Non-Binding Clause

Ready-to-use clause • copy directly

يتفق الطرفان على أن هذه المذكرة تعبّر عن نيتهما المشتركة في التفاوض بحسن نية للوصول إلى عقد نهائي، وأن الأحكام المتعلقة بالتفاوض وإبرام العقد النهائي غير ملزمة، فلا ينشأ أي التزام بإتمام التعاقد إلا بتوقيع عقد منفصل ومستقل بين الطرفين. ومع ذلك، تكون البنود الآتية ملزمة قانوناً منذ تاريخ التوقيع وتبقى نافذة حتى لو لم يُبرم العقد النهائي: السرية، والحصرية، والقانون الواجب التطبيق والمحكمة المختصة، وتحمّل التكاليف، وحسن النية في التفاوض. ولكل طرف حق الانسحاب من المفاوضات بحسن نية ودون مسؤولية عن مجرد عدم إتمام العقد.

The parties agree that this memorandum expresses their shared intention to negotiate in good faith toward a final contract, and that the provisions relating to negotiation and to concluding the final contract are non-binding, so that no obligation to complete the contract arises except upon the signing of a separate and independent contract between the parties. Nevertheless, the following clauses are legally binding from the date of signing and remain in force even if no final contract is concluded: confidentiality, exclusivity, governing law and competent court, the bearing of costs, and good faith in negotiation. Each party retains the right to withdraw from negotiations in good faith and without liability for the mere failure to conclude the contract.

Place this clause near the top of the MOU to fix the binding/non-binding split before the detailed terms.

How to Draft a Watertight MOU

Define the purpose precisely: state what you are actually negotiating (partnership, acquisition, supply) and its scope without overloading it with the final contract's detail.
Separate the non-binding part: state expressly that the intention to conclude the final contract is non-binding and requires a separate contract.
Insert the binding clauses: confidentiality, exclusivity, governing law and venue, and costs, stating they take effect upon signing.
Fix the term: set an expiry for the negotiation period and for exclusivity so neither party is bound indefinitely.
Sign with proper authority: ensure the signatory is authorized to bind the entity, and attach proof of that authority.

Frequently asked questions

Is the phrase non-binding enough to protect the parties?

On its own it is not enough. A judge looks at the substance of the agreement and the parties' conduct, not just the heading. If the contract's elements are in fact complete or performance has begun, the MOU may be treated as binding despite the phrase. Real protection comes from expressly separating the binding from the non-binding clauses and drafting each one clearly.

Can I claim compensation if the other party withdraws from negotiations?

Yes in certain cases. Under the Civil Transactions Law in force since December 2023, both parties owe a duty of good faith in negotiation. If a party negotiates in bad faith or breaks off serious negotiations without justification after leading you to incur significant costs, you may claim compensation for the harm, although you cannot force that party to conclude the contract.

What is the difference between an MOU and a letter of intent?

The difference is more practical than legal. Both record a preliminary agreement before the final contract, and both can be partly binding. An MOU is usually drafted as a bilateral agreement signed by both parties, while a letter of intent takes the form of a letter from one party to another. What governs the binding force of either is the substance and wording, not the name.

Certified template · C-10

The next step

This guide ends with a ready bilingual template, drafted from the statute and its regulations and reviewed by a licensed Saudi lawyer.