The Scaffolding and the Building

A foreign investor spends four months negotiating a South African acquisition, signs a memorandum of understanding on the final afternoon, and flies home to tell the board the deal is secured. He is wrong twice over. In the country he has just left, that document may oblige the other side to almost nothing. In the country he comes from, a similar document may bind him far more tightly than he ever intended. One page, two legal systems, two opposite meanings, and a great deal of money resting on the difference.

I have watched this single misunderstanding drain good deals of their momentum and cost careful people real money. The MOU is neither the trap the cautious fear nor the guarantee the hopeful believe. It is something more useful than either, and more dangerous when it is misread. Most of those who sign one have never stopped to ask what it is actually for.

The Scaffolding and the Building

What a memorandum of understanding can and cannot do

In 2000 a young trainee at a South African mobile-phone company had an idea. A person with no airtime could send a short message, free of charge, asking a friend to call him back. He took the idea to a director. The two men shook hands on an understanding. If the idea made money, the company would pay him a share, and they would agree on the amount later. Nothing was written down. That handshake was an unwritten memorandum of understanding, and it was about to start one of the longest and most expensive fights in South African commercial history.

The idea became Please Call Me. It was used billions of times. The trainee, Nkosana Makate, was paid nothing, so he went to court, and he stayed there. In 2016, sixteen years after the handshake, our highest court held that his agreement was real and binding, and ordered the company to pay him fair compensation. That did not end it. The chief executive offered forty-seven million rand. Makate said the idea was worth billions. The case climbed the courts for another nine years, and in 2025 the Constitutional Court sent it back to be argued yet again. A quarter of a century after a good idea and a handshake, the two sides are still fighting over the one thing they never settled, the number.

Everything that went wrong flowed from a single gap. The two men agreed to agree, and left the most important term for another day. That is the trap this article is about, and two very different readers need to understand it. One is the investor who comes to South Africa from abroad, and above all from China. The other is the South African who sits across the table and does the deal with him. They meet the same gap from opposite sides. The foreign investor tends to believe a signed understanding already binds, when here it often does not. The South African tends to believe he can walk away as he pleases, when in dealing with a Chinese partner he may not. Each is reasoning correctly about his own law. Each is about to be surprised by the other's.

Think of a memorandum of understanding as scaffolding. On a building site the scaffolding goes up before the building does. It is quick to put up, it is temporary, and it is there for one reason. It lets you build the real structure safely and at speed. For close to thirty years I have watched clever people make the same mistake that handshake made, and it is almost always an expensive one. They treat the scaffolding as the building.

Whether a document binds you has very little to do with what you call it. A memorandum of understanding, a letter of intent, a heads of agreement and a term sheet are all the same kind of document. Only the name changes. Each one can bind you fully, bind you in part, or bind you to nothing at all. The name does not decide the question. What decides it is whether you and the other side truly agreed on the terms that matter, and whether you both meant, at that moment, to be legally bound. In South African law that is almost the whole story.

What follows is written for both of the businessmen. It shows where each side's instinct helps and where it quietly lets him down, and how this small document, used well, can carry a deal forward faster than its careful drafters expect.

What is the scaffolding actually for?

Start with what the MOU does well, because it does a lot. It lets two sides who have agreed in principle write that agreement down quickly, before the excitement fades and long before the lawyers produce eighty pages of warranties. It sets the frame. It records the rough price, what is being bought, the timeline, and the conditions the deal depends on. When a good asset has more than one buyer chasing it, that speed is not a small thing. It is often the difference between winning the deal and losing it.

The MOU does more than record. It can take the asset off the market while you do your work. It buys you a protected period to run your due diligence and to check what you have been told against what is true. It gives the seller time to get its house in order before the price and the warranties are locked down. It keeps confidential everything the two sides are about to show each other. It also creates a written record of what you both thought you had agreed. Even when the MOU does not bind either side to the deal, that record can be strong evidence of what you meant if the final contract is ever disputed. Used this way, the scaffolding is exactly what lets you build quickly without building carelessly.

Why you cannot live in scaffolding?

Let’s begin with some good news, because it is the reason deals can move quickly here. South African law gives the two sides wide freedom to contract. They can agree almost anything they wish, on almost any terms, and a court will hold them to it, as long as the bargain is not illegal and not against good morals, what our courts call contra bonos mores. The trouble with most MOUs is never that the law forbids the deal. It is that the parties have not yet truly made one.

So what turns talk into a binding contract? Our law says a binding contract needs three things, and an MOU is usually missing one of them. First, the two sides must truly agree on the terms that matter. Lawyers call this consensus. Second, both sides must actually mean to be legally bound at that moment, and not merely to keep talking. The old authorities call this the animus contrahendi, the intention to contract. Third, the terms must be clear enough to enforce. You cannot be held to a price or a date that you still have to work out later.

It also makes no difference whether the deal is written down or sealed with a handshake. In our law an oral agreement binds exactly as a written one does. Makate's deal was never on paper, and it still bound Vodacom all the way to the Constitutional Court. Writing does not create the contract, but it proves it. An oral bargain is every bit as real, and every bit as dangerous, only far harder to prove once the other side chooses to forget it.

This is why most MOUs bind no one to the deal itself. An MOU usually records the shape of a deal but leaves the important terms to be agreed later. Our law calls that an agreement to agree, and an agreement to agree cannot be enforced. Our highest court of appeal said so in the Firechem case in 2000, and it has said the same many times since. A judge cannot order two people to reach consensus, because what he is tasked to do is to interpret their agreement, not make one for them.

Sometimes an MOU does bind the deal, and it depends on what the two sides meant. Sometimes they mean to be bound at once, and treat the open points as small details to finish off later. Sometimes they mean not to be bound at all until they sign the final contract. A South African court decides which one it was. It does not rely on what the parties say afterwards. It looks at what they wrote and what they did at the time, and at everything around the deal that shows their intention.

Which poles carry the weight?

This does not mean an MOU binds no one to anything. Scaffolding has poles that carry real weight, and a well-made MOU has clauses that bind from the moment you sign, whatever happens to the deal. The most valuable of these is exclusivity. This is a promise by the seller not to talk to anyone else for a set time. It is the single most useful thing an MOU can give a buyer, because it stops the auction while you spend time and money on the deal. The promise only works if it has a clear end date.

Confidentiality is the second pole that carries weight. It protects the information you are about to share, and it survives the collapse of the deal. A due diligence framework is the third. Where it really matters, write it as a stand-alone contract with clear duties and a timeline that both sides must keep, not as a vague hope. The split of costs is the fourth. It disciplines both sides and settles who pays if the deal falls through. The choice of governing law and the place for resolving disputes should also bind from the first signature. Never copy these across from a contract drafted for another country. A clause that is normal in Johannesburg may read very differently, or fail completely, somewhere else. Say plainly, clause by clause, what binds now and what does not. An MOU that does this is a precise tool. An MOU that does not is worth very little.

Whose rules govern the site?

I want to start with the investor from China, because the rules on this site are not the ones he knows. In the law of the People's Republic, a detailed MOU is often treated as a binding contract, and the law places a duty of good faith on the negotiation itself. China's Civil Code took this idea from German law, and the old Contract Law set it out as pre-contractual liability, what the civil law calls culpa in contrahendo. Under that rule, a party who negotiates in bad faith, hides an important fact, or walks away in a way that breaks good faith can be ordered to pay for the loss it caused. It does not matter that the document says it is non-binding, or that it chooses a foreign law. The duty attaches to how a party behaves, not to what the paper says.

Behind that rule sits an idea Chinese business culture has long respected. A signed understanding is backed by the relationship itself, the give-and-take of guanxi (关系). To sign lightly and then walk away damages far more than a piece of paper. South African contract law, and the English law it comes from, starts from almost the opposite place. Here, both sides are usually free to walk away from negotiations at any time, for almost any reason, and the side left with the costs usually has no claim at all. More than thirty years ago the English judges said it plainly that a duty to negotiate in good faith does not fit with the position of a party who is entitled to look after its own interests.

This cuts both ways, and here is the part each side tends to miss. The investor from China must understand that in a South African court his signed MOU may count for very little, so he cannot lean on it the way he would at home. The South African must understand the mirror image. His Chinese counterpart honestly regards that signed page as a real commitment, and under Chinese law it often is. If the South African signs a detailed MOU and then walks away, or reopens terms he thought were still loose, he may face a good-faith claim back in China that no clause calling the document non-binding will switch off. Each man is safe under his own law and exposed under the other's. The deal lives or dies on whether they both see the gap before they sign, not after.

How do you make the scaffold stand?

Return to Makate. His handshake was enforceable at all for one reason. He and the director had agreed who would decide the amount if they could not agree it themselves, namely the company's chief executive. That single point, a way to break the deadlock, was what turned a promise to agree into a promise a court could enforce. Take it away and he would have had nothing. So do what Makate did, only better and in writing. If you want a South African court to hold the other side to a term you left open, give the court a way to fix that term without needing the parties to agree.

Where an MOU leaves a term for later but says that, if the parties cannot agree, an arbitrator or an independent expert will decide it, our courts will enforce it. The important terms can now be settled without anyone's further consent. Our Supreme Court of Appeal drew this line clearly in the Southernport case in 2005. It upheld the agreement because the parties had left an arbitrator to fill in the detail of a deal they had already made.

Do not rely on a judge's sense of fairness to save you. About a decade ago our Constitutional Court seemed willing to develop the law so that a clear promise to negotiate in good faith could be enforced. It did not decide the point, and no court since has taken that step. More recently the same court has made it clear that good faith and fairness are not free-standing rules a judge can use to rewrite a bargain. They shape the law, but they do not override the words you chose.

This is the point that matters most, for both of you. In South Africa, what you write down decides what you are bound to. A court reads two things, the words on the page and the facts around the deal that show what you meant, and both can hold you. Our law also follows a rule called caveat subscriptor, which means a person who signs is held to what he signed, even if he did not read it with care or did not follow every word. For an investor whose first language is not English, and whose home law treats these documents differently, that is a sharp risk. For the South African, the risk is assuming his counterpart reads the same words in the same way. Neither of them should sign an MOU until someone who knows this law has read it and helped shape the words. A short hour with a trained eye before signing is worth far more than a long fight afterwards.

When does the scaffold come down?

Every builder knows the last step of a job. Once the building can stand on its own, the scaffolding comes down, and no one misses it, because it has done its work. The MOU is meant to end the same way. It holds the site while the real agreement is built underneath it. It carries weight where you designed it to. When the final contract is signed, you take it down. Its job is done.

Nkosana Makate had a good idea and an honest claim. What he did not have was a document that settled the one term that mattered, and a quarter of a century later he is still paying for that. The dealmakers who prosper in South Africa, whether they come from Shanghai or Stellenbosch, have learned the lesson he did not. They treat the memorandum as what it is, a fast and temporary frame that carries weight in a few places, and never as the building itself.

The scaffolding is useful and sometimes necessary, but it is not the building.

Written by:

Wessel Badenhorst

Elmien Liebenberg

July 2026

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