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This article is written by Daisy Jain, pursuing B.COM.LLB (Hons) from the Institute of Law, Nirma University. This is an exhaustive article which deals with the legal importance of the Memorandum of Understanding.

Introduction

A Memorandum of Understanding (MoU) is a consensus between two or more parties or it can be between two or more nations to enter into a contract. It is an agreement that is entered much before the parties enter into any future business agreement or arrangement. It is more of an understanding between the two parties wherein they have some mutual understanding points and they do not disclose or violate any of the terms mentioned in an MoU. It is a situation where nations arrive at a common parameter. When the parties arrive at a common consensus then they further indulge in negotiations and discussions and when these negotiations and discussions become successful then they finally enter into an agreement. An MoU is mostly found in international relations, but it is commonly used in business agreements.

Essentials of a valid Memorandum of Understanding

MoU is not legally enforceable in the court of law until the agreement is signed or ratified between the parties or two nations. In most scenarios, MoUs are legally not valid but in a situation where it fulfills all the three essentials of Section 10 of the Indian Contract Act, 1872, it is then said to be legally valid. As to determine the validity of a contract, we look at Section 10 of the Indian Contract Act, which determines the essentials of a valid contract, the same goes with an MoU. There are further some essentials that need to be complied with to make an MoU valid:

  • First and foremost, it is important to determine the intent of parties who need to enter into an agreement and there should be at least two parties to enter into an MoU. 
  • In an MoU, a specific date and time should be mentioned on which it is started and ended. 
  • There should be a clear understanding between the parties regarding the duties and responsibilities. All information regarding payment and finance should be defined clearly. 
  • It should be specified in the MoU about the clauses concerning the allocation of risks and dispute resolution as whenever a conflict of interest arises between parties or any legal injury happens to any one of the parties, it should be cleared in the MoU who will be liable for the loss. 
  • MoU should contain a clause which talks about the termination of an agreement wherein under certain circumstances, any of the parties’ courts terminate their agreement at a given point of time.

MoUs in Indian Law

As per Indian law, MoU is only enforceable in a court of law when it fulfills the provisions of the Indian Contract Act, 1872. To make it a valid agreement, the parties in an MoU should have a legally binding relationship to enter into an agreement. If all the conditions are fulfilled under Indian Contract Act then the parties have a right to make the other party specifically perform the contract under the Specific Relief Act, 1963, if the compensation is not quantifiable.

Are MoUs legally binding

In the case of Jyoti Brothers vs Shree Durga Mining Co., AIR 1956 Cal.280, the Calcutta High Court held that the Court will rely upon the degree to which such understanding is signed between the parties and whether any of them has acted in reliance on such understanding.

Additionally, the Supreme Court held in the well-known case of Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors, AIR 2006(4) SCJ 401, that an MoU can be regarded as a legally enforceable contract if it is in a formal way and the parties profit from functioning in compliance with the provision specified in the MoU.

We can determine the nature of an MoU through its clauses mentioned in the document whether it is legally valid or enforceable or not. If we want to make an MoU legally binding in the court of law, then the clauses such as Confidentiality and Dispute Resolution can be included to legally bind the parties in an agreement. These types of clauses create a legal obligation between the parties. If one of the parties breaches any of such clauses, then the suit can be filed against the defaulting parties in the court of law to make the agreement enforceable.

According to Indian law, a Memorandum of Understanding is not a legally binding agreement in a court of law, but to make it enforceable in a court of law, an agreement must consist of the elements of Section 10 of Indian Contract Act, 1872, which are – 

  • There should be an offer and acceptance in an MoU between the parties. 
  • Parties should have entered into an MoU with free consent. 
  • The parties need to be competent enough to enter into an MoU, that is, the parties should be above the age of 18 years, should be of sound mind, and should not be insolvent. 
  • MoU should include lawful consideration and lawful object, and lastly, in an MoU, the parties must have an intention to enter into a legally binding relationship.

Enforceability of MoUs

The ability to enforce a contract as opposed to a Memorandum of Understanding is the primary distinction between a contract and MoU. Contracts are formed when two or more parties consent to form a legally binding agreement that will be enforceable by law. Parties enter into an agreement after an offer has been accepted and consideration has been paid for the offer. Contracting parties are legally required to adhere to all of the terms and conditions of an agreement they enter into. If a contract’s term or condition is violated, the parties may face legal repercussions as a result of their actions.

Additionally, courts have the authority to rule that parties intended to make only certain parts of a Memorandum of Understanding legally enforceable. A recent decision by the Ontario Superior Court of Justice serves as an illustration of this concept. In Georgian Windpower Corporation et al v. Stelco Inc. (2013), the parties entered into a Memorandum of Understanding that was to last for two years. The agreement, on the other hand, was terminated by the defendant before the expiration of the two-year term. The plaintiff was awarded damages as a result of the wrongful termination of some, though not all, of the terms of the agreement by the defendant.

The structure or drafting of an MoU plays a crucial role. The use of such words would lead to the non-enforceability of a contract:

            Word

          Replacement

            Shall

            Maybe

            Would be

            Can be 

            Should be

            Might be

            Shall

            Can be

The inclusion of the clause of dispute resolution binds the parties in a contractual agreement to perform their legal obligations, and when a conflict of interest or dispute arises, this will lead to the resolution between the parties. It can be said that when the conditions of the Indian Contract Act are not fulfilled in the MoU then it cannot be made legally binding on the parties. But, through promissory estoppel and equity, an MoU can be made enforceable in the court of law and both parties will have a legal obligation to perform their part of the contract.

Important judgments related to MoUs

The enforceability depends upon both parties’ intention to enter into an agreement. The following cases are related to the enforceability of an MoU:

Jyoti Brothers v. Shree Durga Mining Co.

The High Court of Calcutta held in the case of Jyoti Brothers vs Shree Durga Mining Co., AIR 1956 Cal.280, that the Court will rely upon the degree to which such understanding is signed between the parties and whether any of them has acted in reliance on such understanding.

Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors. 

The Supreme Court of India held in Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors. [2006 (4) SCJ 401] that if the conditions of the Memorandum of Understanding are therefore complied with, the parties to the MoU will receive the profit resulting from the MoU. As stated above, it leads to the conclusion that the binding nature of a Memorandum of Understanding is dependent on the intention of the parties, the language used in the agreement, as well as the nature of the agreement. The conduct of the parties following the execution of the MoU is also a pertinent factor in determining the enforceability of the MoU.

M/s. Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag

The High Court of Delhi held in the case of M/s. Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag [AIR 1991 Del 315] that where the important significant conditions have been consented upon and reduced to written form, and the agreement so entered into does not cite that another legal agreement will be implemented, the agreement will not be considered an incomplete contract. The Court went on to say that the mere heading or title of a document would not be sufficient to determine its lawfulness. The validity of the agreement will be based on the nature and parts of the agreement.

Subimalchandra Chatterji vs. Radhanath Ray

According to the decision in the case of Subimalchandra Chatterji vs. Radhanath Ray [AIR 1934 Cal 235], a Memorandum of Understanding (MoU) can be enforced despite its deficiencies based on equity and promissory estoppel.

Brikram Kishore Parida v. Penudhar Jena

In the case of Brikram Kishore Parida v. Penudhar Jena (AIR 1976 Orissa 4), the court stated that the objective test for intent to establish legal relations is the most appropriate. If a prudent person would believe that the promisor intended to enter into a contract, then the promisor will be required to fulfill his or her obligations under the agreement. Consequently, caution must be exercised when drafting a Memorandum of Understanding, particularly when it comes to the language, titles, and clauses that are used. Clauses such as the indemnification clause, the relevant law clause, and the jurisdiction clause are legally enforceable on the parties to the agreement.

Conclusion

A Memorandum of Understanding (MoU) possesses unique authority based on the assertion that it serves as a substitute to a legally binding agreement to establish a legally binding relationship between the parties concerned. In the process of drafting the Memorandum of Understanding, it is essential to consider not only the parties’ communicated intentions, but also the clauses of the document, language, and title, as failure to do so would lead to a significant financial loss to the parties involved.

The intention and negotiations amongst the parties, as manifested in the terms of the MoU, are critical to the enforceability of the agreement. The validity and enforceability of a Memorandum of Understanding will differ depending on the components and purpose of the agreement entered into by the parties.

The question as to whether a Memorandum of Understanding is legally enforceable or not must be decided by the courts. As previously stated, an agreement will be binding if it satisfies the requirements of a valid contract, which include the existence of a valid offer, acceptance, the intention of the parties to be contractually obligated, and consideration, or if a party acts in reliance on an agreement. One of the most important aspects to take into account when determining the legality of a Memorandum of Understanding will be the intention of the parties at the time of its execution, which will be inferred from the terms and conditions of the Memorandum, as well as the parties’ conduct following the implementation of the Memorandum. Accordingly, the parties must act responsibly when drafting the clauses, titles, and language that will comprise the Memorandum of Understanding (MoU).

References

 


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