Memorandum of Understanding
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This article is written by M.Arjun, a 5th-year student studying in Government Law College, Thrissur. This article deals with the Essentials of a Memorandum Of Understanding.

Introduction

A memorandum of understanding is sometimes called a “gentleman’s agreement”. They are a set of guidelines that governs two parties, while working towards a common line of action. A MOU is simpler and often a less complex document when compared to normal contracts. When two or more parties agree to work towards a common objective, without a legally binding contract, an MOU is created. MOUs in general sense isn’t legally enforceable and the parties to the MOU avoid all sorts of legal ramifications. Rather, it signals the intention of the parties to enter into a formal legal agreement. That means an MOU is usually followed by a standard legal contract. MOUs are usually used in international treaties as well as high stake business affairs such as merger talks.

Need for MOUs

It may be surprising to see two parties entering into an MOU in lieu of a legally enforceable contract. But MOUs are much more appealing to parties due to its simple and less complex nature. It does not take much time and effort in creating an MOU when compared to a legal contract. The need for standard terms of a contract and hardcore negotiations are also minimised. Parties need not avail the help of a lawyer for entering into an MOU especially when there is no money involved in the mutual arrangement. It describes the accepted expectations of the parties provided they can come together to explain what they offer in return and negotiate over the same. Once they reach an agreement an MOU is created. An MOU is always considered when the parties desire to avoid legal implications before creating a valid agreement. So it makes sense for parties to enter into an MOU which is always a softer document while compared to a contract.

Essentials of an MOU

Memorandum of Understanding is always different from a normal contract but shares a lot of similarities. It is an agreement before an agreement. Hence many provisions in a standard contract can be found within an MOU such as the non-disclosure clause, indemnification clause, dispute resolution mechanism and so on. Important essentials of MOU include:

Parties to the Agreement

An MOU should mention the parties to the agreement. Each partner to an MOU should be described. The parties, as well as there organisation, should be easily identifiable. Similarly, details of all those who are involved in the agreement should also be specified in the MOU.

Purpose of the MOU

A clause defining the purpose of the agreement is an integral part of an MOU. It should describe the reason for which the MOU is created. It specifies how the collaboration between parties benefits the other party. The overall intention of the parties is to be laid out so that the parties will not have any undisclosed intentions that can lead to a future dispute. 

Duties and Responsibilities

This is yet another crucial part of the MOU where the duties and responsibilities of the parties are clearly identified. It is always a better practice to list down the duties and responsibilities of each party separately. Shared responsibilities should also be expressly provided. Provided this clause directly affects the purpose of the MOU as well as the interest of the parties. Hence, it is always drafted with clarity and is often the lengthiest part of the MOU.

Time period

MOUs are not normally perpetual. The period from which the MOU will commence along with the period of dissolution of the mutual partnership should be added. The exact date of entering the agreement should be set out in the top part of the agreement.

Confidentiality

Confidentiality expectations of the parties are described within this clause which mandates the parties to stick to the privacy provisions of the transaction. This section can be used especially when the transaction involves sharing of intellectual property or other secrets which has to be protected from access to a third party.

Scope of the transaction

Role of all third parties and other agencies involved in the transaction should be decided by the parties. All the exclusions and inclusions in relation to the partnership should be stated to avoid uncertainties. 

Indemnification

This clause governs situations when something happens unplanned or accidental to the mutual collaboration agreed by the parties in advance. Specifying the party who bears the risk of the transaction is crucial. It makes sure that the responsibility during such instances is not merely assumed. A provision for indemnification should be mutual in nature and each party shall indemnify the other for all the losses caused due to the negligent behaviour of such party. The parties should also make sure that there should be a mechanism for the actual payment of the losses since a mere willingness to pay will not rectify the harm caused to the opposite party.

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Financial Implications

If the transaction is related to money, then the provisions relating to financial implications should be given separately. It helps in adding clarity to the MOU by answering questions such as the parties obliged to make the payment, the receiver of payments and so on.

Conditions for Alteration and Termination

The conditions upon which the terms of the MOU are amended or altered are agreed upon by the parties within this section. Parties can also agree upon a notice period by which a party can terminate the MOU by serving notice as per the provisions under the notice period.

Restrictions

The parties can also set out restrictions on the other party such as privacy statements and disclaimers related to certain provisions or in compliance with certain statutes.

Dispute Resolution 

Unlike standard contracts, an MOU is not legally enforceable unless the parties expressly provide for the same. Hence, a formal method for dispute resolution such as arbitration is normally avoided in an MOU. When disputes occur, the parties should agree to resolve disputes in good faith through mutual negotiations. If the disputes remain unsettled for a prescribed period, the disputes should be referred to the higher officials of the organisation for whom the parties represent. In any case, if the dispute still continues the parties can agree to a mechanism other than the ones specified under this clause for settling the disputes.

The Supreme Court of India, in the case of “Ashapura Mine-Chem Ltd v. Gujarat Mineral Development Corporation”, has upheld the validity of the arbitration clause in a memorandum of understanding. The court held that the provisions for arbitration in an MOU exists as an independent agreement. While referring a dispute to arbitration the parties should also agree whether the arbitration proceedings will be before a sole arbitrator or else wise. If the MOU is silent on aspects related to the arbitration proceedings, the court can by itself invoke Section 11 of the Arbitration and Conciliation Act 1996.

Legal Enforceability of an MOU

As mentioned earlier, an MOU is not usually legally binding. In the case of Jyoti Brothers vs. Shree Durga Mining Co the Calcutta High Court held that a contract to enter into a contract is bad and is not valid from a legal standpoint of view. Contrarily, in the case of Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors the Supreme Court held that if an MOU is in a formal shape and if the parties benefit from acting in accordance with the terms listed out in the MOU, it can be considered as a legally binding agreement. MOUs are governed under the Indian Contract Act, 1872 and are enforced under the Specific Reliefs Act, 1963. As per the Indian Contract Act, an MOU becomes a contract if it fulfils the conditions laid down hereunder. There should be: 

  • An offer
  • Acceptance
  • Valid consideration 

If an MOU fulfils all the requirements for being a valid contract, it becomes legal under the Indian Contract Act and thereby enforceable under the Specific Reliefs Act, 1966.

Legality and enforceability of an MOU often depend on the contents of the MOU, the language used, as well as the duties and obligations listed out in the MOU. An MOU is often an ‘agreement to agree’ and does not create obligations upon the parties. However, an MOU creates obligations upon the parties if the same can be adjudged from the clauses contained in the MOU. Addition of an indemnification clause, dispute resolution clause and applicable law clause can make the agreement binding. This is because these clauses create obligations on the parties to follow the terms specified in the MOU. Similarly, adding an explicit clause for making the MOU legally binding can also result in the legal enforceability of the MOU. The language used in creating an MOU is also pivotal in deciding its legality. For instance use of words “shall be, would be” instead of “maybe or can be” can have a huge impact on the legality. Use of words such as “shall and would”, will necessarily have a binding effect on the parties. Hence, apart from the express intention of the parties, these indirect situations that can restrain the non-legality status of an MOU. Merely calling a document as an MOU would not circumvent its enforceability before the courts.

Differences between MOU and Contract

Memorandum of Understanding

Contract

An MOU in general is not legally binding or enforceable. 

Contract is always legally enforceable.

MOUs do not normally require the realization of conditions such as an offer, acceptance or a valid consideration.

A contract always involves an offer, acceptance and a valid consideration.

MOUs are always written.

A contract can be both oral or written.

MOUs are not always registered.

Contracts if written, are registered and all legal formalities are satisfied.

The choice of legal enforceability is always with the parties to the MOU.

Breach of contracts comes with a legal liability.

For example, if you want to purchase a house after 6 months, you can pay an advance and enter into an MOU with the owner by mentioning the terms and conditions of both the parties.

When the actual sale happens a legally binding contract is created by the parties.

Differences between MOU and Letter of Intent

An MOU and a Letter of Intent are sometimes used synonymously due to their relatable nature. They share several features in common like their non binding nature and as an instrument relied on by the parties when they agree to a common action. However, there are few differences between them. 

Memorandum of Understanding

Letter of Intent

An MOU may have more than two parties involved.

A letter of intent is always created by parties.

An MOU is signed by all the parties involved in the transaction.

Whereas, in a letter of intent only the person proposing the transaction or describing the intention to take an action is the only signatory to the letter of intent.

Things to keep in mind while drafting an MOU

It is quite obvious that the parties to the MOU do not intend the agreement to be legally binding. But poor drafting can make the MOU pointless. Hence, it is crucial that the MOU should be drafted in such a way that it serves the purpose of the parties.

  1. If the parties want the agreement to be legally binding they should expressly state that in the MOU.
  2. Although an MOU in general is a non binding document, certain provisions in an MOU can have binding effect. 
  3. The parties should add various provisions in a coherent manner. Meanwhile, one should always understand that an MOU can become binding even if its not made deliberately. Utmost care must be exercised while drafting, to prevent the MOU legally binding as a result of a mishap.
  4. Adding a provision with the intention to make it legally binding such as a confidentiality provision, privacy provision or dispute resolution can make the MOU legally binding.
  5. If the terms of the MOU are similar to that provided in a legally binding agreement, then those provisions can make the MOU binding.
  6. Use of softer language which does not impose strict obligations upon the parties should be considered while drafting the MOU. Inclusion of excessive detail with regards to payment, delivery of services etc should be avoided.
  7. Organised structure is very much essential for a good draft. Hence, it is always a common practice to rely on a template. 
  8. If the MOU is created by the parties themselves, it is advisable to check the same with a lawyer so that it doesn’t become legally binding by accident.

Conclusion

MOUs hold a potential power especially when considering that they exist as an alternative to a legally binding agreement at instances where the parties come together at the initial stage of a transaction. In addition, the process of creating an MOU is quite straightforward. The only caveat is that while drafting paramount consideration has to be given for the titles, language, and clauses of the Memorandum of Understanding, failing in this can lead it to a loss for the parties.

References

  1. https://blog.ipleaders.in/mou-and-its-enforceability-in-india/
  2. https://people.howstuffworks.com/memorandum-of-understanding1.htm
  3. http://www.legalserviceindia.com/legal/article-709-the-legal-validity-of-mou-in-india.html
  4. https://diylaw.ng/resources/8-things-to-know-when-drafting-a-memorandum-of-understanding-mou/
  5. https://formswift.com/memorandum-of-understanding

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