This article is written by Nikita Gupta, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from lawsikho.com.
Table of Contents
What is a memorandum of understanding
A Memorandum of Understanding (MOU) is a non-binding agreement between two or more parties which outlines the terms of understanding between said parties. It establishes the roles and responsibilities to be carried out by each party and is often the first step towards a formal contract.
Even though an MOU is not binding, many people enter into an MOU before entering into a formal contract as it establishes intent and sets a tone towards future dealings and transactions. MOUs differ in length and complexity depending upon the nature of understanding between the parties and the nature of the transaction. For example, the cultural committees of two colleges may enter into a simple, one-page MOU which states that each college will send a contingent to participate in the cultural events of the other college to increase participation as a mutual benefit. However, an MOU between two countries regarding a trade policy is much more complex in nature and contains detailed terms outlining the roles and responsibilities on the part of each country.
Is a memorandum of understanding enforceable in the court of law
Typically, an MOU is not enforceable in the court of law. However, it is still considered to be a serious document and may be used as a base document to state the intent of the parties.
The parties may include certain clauses like a non-compete clause, a confidentiality clause, non-solicit clause etc that are binding in nature.
In India, MOUs are governed by the Indian Contract Act. If a memorandum of understanding fulfils the basic requirements under the Contract Act, then it may be enforced, unless the MOU specifically states that it is non-binding in nature.
It is advisable to always specifically mention that the memorandum of understanding is non-binding in nature every time if the parties do not want it to be enforceable.
Advantages of entering into a memorandum of understanding
Entering into a memorandum of understanding before a formal contract has many advantages:
- It sets the tone for future dealings: Negotiating the terms of a contract is a lengthy and a tedious process. The parties may lose sight of their original intent during the course of fine-tuning each and every term for the contract. However, they can always refer back to the memorandum of understanding to remind themselves of the tone that they had set for the said transaction.
- It conveys seriousness: Even though an MOU is not as formal as a legally binding contract, it is more formal than a gentlemen’s agreement and it holds a certain level of seriousness and mutual respect.
- It helps in maintaining confidentiality: In case of a diplomatic agreement between two or more countries, unlike treaties, a memorandum of understanding can be kept confidential. Moreover, they are easier to ratify as compared to a treaty.
Who can enter into a memorandum of understanding
An MOU is used in both, international and domestic agreements. It can be entered into, by an individual, an entity or even a country. The simple answer to this question would be that anyone who is allowed to enter into a contract under Contract law can enter into a memorandum of understanding.
The Indian Contract Act, 1872 states that “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.”[i]
However, the more difficult answer to this question lies in understanding what purposes does a memorandum of understanding solve.
Broadly, a memorandum of understanding can be used for the following purposes:
- To express intent
A memorandum of understanding is used to express the intent of the parties before entering into a formal contract. A well drafted MOU specifically states the overall intent of the parties involved, the details of the parties, the roles and responsibilities of each party, the time period of the agreement, any disclaimers that may need to be given, financial arrangements and the risk sharing of each party.
This helps the parties to understand the tone of their future dealings and sets a base for fine tuning the terms of the formal contract.
An MOU not only helps to express intent, it also helps to understand the intent of the opposite party. Not just the intent, but if the parties are dealing with each other for the first time then it helps them understand how the other party operates before they actually enter into a formal contract.
For example, if a party is hesitant to put something in writing then it’s a huge red flag. It may indicate bad faith or a malpractice by the party hence giving a chance to the other party to re-evaluate their understanding.
- To initiate a partnership without creating legal obligations
Whenever two entities want to enter into some kind of a partnership but want to do so without creating legal obligations for themselves, they may enter into an MOU instead of a formal contract.
This may be done to establish mutually beneficial goals. The parties may want to establish an understanding in good faith but may want to keep it flexible at the same time and avoid legal obligations in light of changing scenarios.
For example, in a situation where a company is allowing an NGO to use its space for conducting workshops on alternate Sundays without charging any fee, they may prefer an MOU as compared to a formal contract. This is a partnership that is being initiated in good faith and for a charitable purpose. The company does want any legal obligations upon itself to keep up with providing the NGO with the said space in case of changed circumstances. It is always easier to get out of an MOU as compared to a formal contract. Also, for a contract to be valid, there needs to be a consideration of some kind which the NGO does not have the capacity of paying, hence the NGO may also prefer to initiate an MOU as compared to a formal contract.
- In Public International Law: to maintain confidentiality and for easier implementation
In international law, memorandums of understanding are placed within the broad category of treaties. For this reason, they do need to be registered in the UN treaties collection to avoid secret diplomacy; however, they may be kept confidential. Confidentiality is one of the reasons, a country may want to enter into an MOU rather than a contract or any other form of a treaty.
Many countries also enter into memorandums of understanding as they are much easier to implement and may be put into effect without legislative approval.
For example, in a program introduced by the United Nations, named the Oil For Food Programme, the government of Iraq entered into a memorandum of understanding with the United Nations to sell oil at market price in exchange for food for the people of Iraq.[ii] Given the political situation in Iraq, it was easier for the government of Iraq and the United Nations to enter into an MOU. As a result of this MOU, the people of Iraq were finally able to eat food. About 60% of the population of Iraq depended on the food that was distributed to them as a result of this deal.
The idea for the oil for food programme was introduced in the United Nations in 1995 and the MOU was signed by the Secretariat of the United Nations and the Government of Iraq by 1996 through a resolution of the Security Council[iii]. If instead of an MOU, a contract or a treaty were to be signed, it would have taken years to fine tune the terms and to ratify the same, while millions of people would suffer without the basic food provisions in their country due to the trade sanctions that had been imposed on Iraq.
Any individual or entity looking to fulfil the above-mentioned purposes must enter into a memorandum of understanding.
Conclusion
To conclude, a memorandum of understanding is a non-binding agreement (with exceptions) between two or more parties and is usually the first step in the initiation of a formal contract. Any individual, entity or country can enter into a memorandum of understanding if they are within the legal capacity to enter into a contract. However, they should enter into one only if they want to express their intentions to the opposite party, understand the intention of the opposite party or initiate a partnership without creating any legal obligations. in international law, countries enter into an MOU if they want to maintain confidentiality or if they want to a quick and easy implementation of the said understanding. Most of the reasons to enter into an MOU fall within the above-mentioned broad categories.
References
[i] Section 11, Indian Contract Act, 1872, Act No. 9, Acts of Parliament, 1872 (India).
[ii] S.C. Res. S/1996/356, (May 20, 1996)
[iii] Id.
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