MARKET FAQ

The sequence is not fixed, and an MOU does not mean the deal is settled. How far an MOU binds the two sides depends on what you and the other party agree, and on how you write that agreement into the clauses. Going from an NDA to an MOU and then to a formal contract is one common route, not the only one. In some deals the two sides skip the MOU and move from the NDA straight to the formal contract. In others there is no MOU at all, and one party issues a letter of intent (LOI) to the other. In others the parties negotiate the formal contract from the start and set out the confidentiality terms inside it. All of these routes are common. An MOU usually carries no binding force, which means that if the other side does not follow it, you cannot necessarily claim damages. You can, however, make all or part of an MOU binding, and to do that you state expressly in the clauses which provisions are binding. Drafting it this way is common practice and is the recommended approach.

One thing matters when you make a provision binding. If the other side breaches it, you need to be able to seek damages or another remedy. Deciding which provisions to make binding is therefore not a choice about drafting format. It is how you allocate risk. So which provisions should be binding? The answer depends on your business priorities. Work out in advance what you need to protect in this partnership and what you need to obtain from it. Once those two are clear, you can see which provisions have to be binding.

1. Pull out your MOU, or the draft the other side sent you, and check whether it separates the binding provisions from the non-binding ones. If the document says nothing about binding force anywhere, which provisions bind you and which do not stays unclear across the whole document. 2. Pick out the terms you need locked down first and write them as binding provisions. Three kinds of content are commonly made binding in an MOU. The first is exclusivity, meaning that for a set period the other side negotiates the same partnership with you and with no one else. The second is confidentiality. The third is the covenants, the things each side promises to do or not to do. 3. At an early stage of the discussions, agree with the other side on how this partnership will run. Whether you will sign an MOU, which document the confidentiality terms go into, and when you move to the formal contract. None of this has a standard answer, so the two sides must align on it early.

Case: Taiwanese startup A was negotiating a contract with a Japanese partner. Company A wanted the basic terms locked down early, so that the later negotiation of the formal contract would leave the overall framework untouched and adjust only the details. It therefore tried to insert a provision making all, or most, of the MOU binding. Once the Japanese side saw that the whole document would bind it, it began reviewing the MOU carefully, and the MOU was in substance treated as a formal contract. As a result, the MOU stage alone consumed a considerable amount of time.

It may have been, and it may not have been. Under Japanese law, some contracts must be concluded in writing, or require a written document to be delivered after conclusion, and a guarantee contract is one of them. As a general rule, however, writing is not a requirement for a contract to take effect, and an agreement reached orally is formed in the same way. There is a second situation to watch. A contract can still be formed without a seal and without a signature. An LOI is another situation that requires care. It is a letter of intent, a document that in form one party simply hands to the other. In practice, though, the content of an LOI is often negotiated and adjusted by both sides. When that happens, the two sides may be regarded as having agreed on the content set out in the LOI. Conversely, if the two sides intended to affix a seal or to sign and have not yet done so, that situation can support a finding that no contract was formed. Reaching a broad agreement over email does not by itself form a contract either. If the detailed terms you actually need to perform that agreement have not been settled, it may not be regarded as having been formally concluded.

What content was agreed, and at what stage it was agreed, is often where a dispute starts. So whenever you agree anything, put it into a written document such as a contract. This matters a great deal in practice. Agreeing something in a meeting or over email and then leaving it there, without pinning the terms down, is what you want to avoid. So how is it decided whether a contract has been formed? What gets examined is how the two sides reached agreement, established from the relevant records and from what each side actually did. The form of the document does not decide the outcome. A contract does not have to be on paper either, and electronic signatures are now widely used to execute contracts.

1. Whenever you agree anything, put it in writing and keep it. Take what you settled in a meeting or over email, write it up, and send it to the other side for confirmation rather than leaving it as it is. 2. Check that the detailed terms you need to perform the agreement have been settled one by one. Work out what you actually need in place to carry out the transaction, and write all of those terms in. A broad agreement on its own may not be regarded as having been formally concluded. 3. When you change terms with a party you already deal with, keep a record of the process. Changing the terms of an existing contract, or entering into a new transaction, raises the same question of whether an agreement has been formed. If terms were discussed but signing was never completed, whether the original contract still stands or the new terms have been agreed becomes the point in dispute. Cases like this bring in some further points: how the original contract was concluded, the reason and background for the change, and what each side said and did afterwards. So keep records of all relevant exchanges.

You can use an electronic signature, and an electronic contract needs no revenue stamp. If you sign on paper, practice has settled conventions on which seal to use and on how to affix it. A Japanese company mainly uses three seals. The registered seal (jitsuin, 実印) is one the company has registered, and it goes on important contracts. The bank seal is registered with the bank when the company account is opened, and it is used for banking. The ordinary seal is any seal other than those two, and it goes on everyday transaction documents such as purchase orders and receipts. There is no rule of law on how the three are divided up, and which documents take the registered seal and which take the ordinary seal is largely a matter of custom. Signing by electronic signature is now quite widespread in practice. People sometimes assume that large companies place more weight on seals, but the opposite is often true. Large companies have frequently moved further on electronic contracts, for reasons such as efficiency in managing their contract records. Long-established companies and smaller companies, on the other hand, often still place weight on paper contracts. Stamp duty is a tax charged on certain categories of document, including contracts. It does not affect whether a contract is formed or effective, but failing to pay it exposes you to a penalty tax. Typical taxable documents are contracts for the sale of real estate, loan agreements, basic agreements for continuing transactions, and receipts for 50,000 yen or more. An electronic contract needs no stamp.

Affixing a seal does not affect whether a contract is formed. Preparing a contract document is not in itself a legal requirement for formation or validity, so affixing a seal is not one either. A registered seal does something different. Where a contract bears one, its formation is presumed to be genuine. So what the seal affects is not whether the contract is valid, but the evidential weight of the document if a dispute arises later. Stamp duty works the same way. It does not affect the validity of the contract, but there is a penalty for not paying it. The documents most easily forgotten in practice are basic agreements for continuing transactions and receipts. Paper contracts also carry a problem specific to cross-border deals. Working out the order in which each side affixes its seal or signs throws up a lot of practical difficulties.

1. Decide first whether you will sign on paper or use an electronic contract. An electronic contract can be concluded quickly and needs no stamp duty. If you go electronic, check once more before the final signature that the amendments have been carried through properly and that no deleted clause has been left in. Repeated rounds of amendment and negotiation on the file produce several versions, and the wrong one can end up being signed. 2. If you sign on paper, check which seal to use. Important contracts take the registered seal. Practice also has settled conventions on how a seal is affixed, such as a seal stamped across the page boundaries when the contract runs to several pages, and a seal stamped across the copies when several copies are made. Check these before you stamp. 3. Check whether the document is subject to stamp duty. Contracts for the sale of real estate, loan agreements, basic agreements for continuing transactions, and receipts for 50,000 yen or more are the typical taxable documents. An electronic contract needs no stamp.

Not necessarily. You cannot assume that most Japanese companies use a ringi system. Rather than guessing how much longer it will take, first establish how this particular company makes its decisions. At a startup in particular, it is not unusual for the president to make a prompt decision alone. Traditional large companies, by contrast, often have an internal approval process such as ringi (稟議), in which a proposal is circulated for sign-off step by step, and reaching a final decision can take time. Certain material contracts may also need a decision from the board of directors or the management committee. Whether a contract counts as material depends on its scale and its content. Meetings of that kind are usually held on a fixed schedule rather than convened as needed, so the proposed contract must first be placed on the agenda, which can lengthen the timeline. That said, a startup that decides quickly is not free of hurdles either. Signing can also require the consent of a third party. Where a shareholders' agreement or an investment agreement so provides, the contract may require the prior approval of the investors. Taiwanese companies and Japanese companies alike can run into this. To understand the timeline, work out in advance what preparation and what procedures are needed, including the other party's internal process, and then work backwards from there.

The timeline depends mainly on how many approval steps are required and when the next meeting is scheduled. It cannot be judged simply from how keen the other side appears. So rather than waiting, ask the other party about its approval process and timeline at an early stage. The earlier you ask, the easier it is to plan your own schedule. There is a second point. Some of the steps that can speed things up are within your control. Whether the person handling the matter has all the necessary information and materials can also affect how smoothly the internal approval process moves. So the question to ask is not only when it is likely to be ready, but what else you need to prepare for them.

1. Ask the other side three things early: what procedures this matter requires, what has to be done and by when, and what documents and data are needed. 2. Check your own side as well. Look at whether your shareholders' agreement or investment agreement requires the prior approval of the investors before you sign a contract of this kind. List the preparation and the procedures you need, and work backwards from the other side's timeline. 3. Concluding a formal contract can take considerable time. Using an MOU and dividing the work into phases, such as a PoC, are practical ways to keep the project moving. A PoC is the stage where you run a small-scale trial to confirm feasibility.

If nothing is stated, the applicable choice-of-law rules determine it, and the result is not necessarily in your favour. Choosing Japanese law also does not mean a dispute has to be heard in Japan. The governing law and the place where disputes are resolved can be agreed separately. Which country's law applies to a contract is settled by each country's own choice-of-law rules. Under Japanese choice-of-law rules, the parties may generally choose the law governing their contract. The governing law determines which country's law applies to the formation and effect of the contract. If the contract states a governing law, that law applies as a rule. If nothing is stated, Japanese choice-of-law rules point to the law of the place most closely connected with the contract. For a contract between Taiwanese and Japanese companies, that is likely to be either Japanese or Taiwanese law. A further presumption may then apply. Where one party performs the characteristic obligation under the contract, the law of that party's habitual residence is presumed to be the law most closely connected. Take a sale: what characterises it is delivery of the goods by the seller, not payment of the price by the buyer. The seller therefore performs the characteristic obligation. So where a sale between Taiwan and Japan states no governing law, the law of the seller's habitual residence is presumed to apply. Dispute resolution provisions, such as jurisdiction and arbitration clauses, may be agreed separately from the governing law. The parties may, for example, agree that Japanese law governs while the Taiwanese courts have jurisdiction. A dispute under that contract would then be resolved in a Taiwanese court applying Japanese law. Because the court has to decide on the basis of foreign law, aligning the governing law with the jurisdiction may make an appropriate and predictable decision more likely.

Arbitration rests on agreement between the parties, so where there is no agreement on dispute resolution, the dispute will generally have to be resolved through litigation in Japan or Taiwan. Which country's courts have jurisdiction is determined under the applicable rules of civil procedure in each country. So why keep the governing law aligned with the jurisdiction or the other forum for resolving disputes? Beyond the problem of a court applying foreign law, there is a more practical point. Your own country's law is more familiar to you, which makes outcomes easier to predict. At the contracting stage, checking the detail of the other country's law is not easy.

1. State the governing law in the contract. Leave it out and the applicable law is settled by default rules rather than by you. 2. Decide where disputes will be resolved at the same time, and keep it aligned with the governing law as far as you can. Separating them is possible, but the court hearing the case then has to decide on the basis of foreign law. 3. Review your NDA as well. NDAs often contain governing-law and jurisdiction clauses, those clauses are frequently carried over into the formal contract, and renegotiating them can be difficult. Conversely, where the NDA states a governing law and the formal contract does not, the governing law stated in the NDA may end up applying to the formal contract as well. If the two documents contain different governing-law or jurisdiction provisions, which document's clause applies to a given dispute becomes unclear and needless disputes can follow. These clauses attract little attention during negotiation but can cause serious problems later, so have them reviewed by counsel in advance.