MoA

This article is written by Ms. Sushree Surekha Choudhury, a law student at KIIT School of Law, Bhubaneswar. The article talks about every aspect of a Memorandum of Agreement which is widely used in the corporate world. The article provides practical knowledge on the topic with the help of a sample agreement and tips for drafting. 

It has been published by Rachit Garg.

Introduction 

Let us go backward in time, some odd 20 – 30 years. Why, you ask? Have you ever made pacts with your friends or cousins? Did you have one of those pacts where you kept your brother’s secret safe from spilling to your parents and he did the same for you in return? Did you and your friends ever make an ‘Avengers Fans Forever’ club and make a pact to always be loyal? Those pacts were important, no? What would you do if someone broke that pact? That would be a religious violation, wrong to the very core of being, no? What if I say that we as grown-ups still do this, make pacts, expect adherence, and non-adherence is treated as bad? The only difference is that it is now on graver subjects, requiring legal help and regulatory compliance. You read it correctly. And before you assume, no, this is not belittling your childhood pacts. Dare I do that? They were equally grave and important, for sure. So much so that the idea continues. 

One such ‘grown-ups pact’ is known as a ‘Memorandum of Agreement’ in the corporate language. A Memorandum of Agreement helps secure a business relationship between two individuals or corporations on a mutually agreed and mutually beneficial basis. In this article we will learn more about this ‘grown-ups pact’ and I shall stop calling it that from now on!

What is a Memorandum of Agreement 

A Memorandum of Agreement (MoA) is a legal agreement entered into between two parties who intend to come together as business partners for a specific business purpose. It could be in pursuance of a common objective or for the fulfillment of a project together. For this purpose, an MoA is signed between the parties. An MoA specifies the terms and conditions for undertaking a specific project or reaching a desired business goal. The goal or project to be undertaken and ways of achieving it are also specified in an MoA. An MoA is entered into between parties to establish a legal relationship and understanding between the parties. It specifies the terms of working together. It may or may not be followed by a more comprehensive contract between the parties, as they will. An MoA specifies the reason for a joint agreement between the parties; it explains the business synergy. It also maintains transparency for both parties as well as the respective companies’ stakeholders. It is a form of purpose statement and talks about the expected outcome of the agreement between the parties. 

Elements of Memorandum of Agreement (MoA)

Generally, an MoA contains the following information:

  • Purpose of entering into an MoA
  • Description of parties
  • Duties of each contracting party 
  • Nature of work to be executed 
  • Time limits
  • Ways and manners of funding 
  • Duration of validity of an MoA
  • Termination and breaches
  • Signature of parties

While discussing a sample MoA in this article, we will understand the components of an MoA and its essential elements in detail.

Is a Memorandum of Agreement legally binding? 

What makes an MoA significant and useful is its nature of being legally binding. An MoA is legally binding. This makes it easier for the parties to maintain clarity and provides security in the joint venture undertaken. That said, since it is a legally binding agreement, it should be valid under the Indian Contract Act of 1872. Thus, an MoA must possess the following elements:

  • An MoA must be signed by both parties. 
  • An MoA must be entered into with the free consent of both parties.
  • An MoA must be in writing.
  • Parties must be clear on the terms and conditions of the agreement.
  • An MoA must be entered into for a specific purpose that involves acts/omissions by both parties.
  • An MoA must be made legally to fulfill a legal purpose. 
  • Obligations in the agreement must be lawful. 
  • An MoA must be entered into with good faith and bona fide intentions.
  • Parties must be legally competent to enter into the agreement by having attained the age of majority. No party should be an undischarged insolvent or convicted of an offense involving moral turpitude. Parties must possess sound minds. The parties must not be disqualified or barred by any law from entering into the agreement. 

Reading a Memorandum of Agreement 

Here are some tips that will help in reading and understanding an MoA better:

  • First, if you have hired your lawyer correctly, they will always draft your MoA in the easiest, clearest, and most concise manner. Your job here is to read the agreement, word by word, and take enough time to fully understand each clause. Never sign before understanding.
  • Do not be afraid of legal jargon. Try to comprehend, or seek help from someone who knows better.
  • Even though you might have hired a legal professional to do the job, if you are someone who deals with legal agreements frequently, the best thing to know is the basics. Know the terms used regularly in the agreements you come across often.
  • If you are unclear or doubtful about anything or any part of the agreement, always seek clarification. Ask your lawyer, ask the lawyer of the other party, or ask the other party directly.
  • Before giving your consent to an agreement by signing it, ensure that you are capable of fulfilling and abiding by the set terms and conditions. If you are a business person, ensure it suits your requirements and earns you what you wish for (which is usually profits).
  • Before giving your consent, conduct a meeting with others in your organization/corporation entrusted with the duties of fulfilling these obligations. 
  • Before signing the agreement, ensure that your rights are well protected by it.

Nature of Memorandum of Agreement (MoA) 

An MoA is a legally binding document establishing a relationship between its parties in the fulfillment of a common objective or for a particular work project. It is ideal to use an MoA in the following legal situations:

  • When two organizations or corporations join hands to complete a project together (joint ventures), an MoA helps to establish a legally binding relationship. It is entered into in furtherance of an objective other than the supply of goods or services. 
  • To establish a legal relationship for affiliation. These affiliations might be due to business synergies or on a mutually beneficial basis. An affiliation involves sharing of labour force, equipment, finances, connections, etc.
  • An MoA can also be entered only for the purpose of sharing. For instance, one organisation can agree to share its machinery in exchange for the factory establishment of the other party. This could be for a particular project on a short-term or long-term basis.
  • An MoA can also be entered into with a future promise which is contingent on the happening or not happening of an event. 

Where is it ideal to use a Memorandum of Agreement

A Memorandum of Agreement can be used in different instances as per the will of its makers and it would be valid everywhere. This is because an MoA is like a conditional clause agreement with necessary specifications, and one such agreement can always be used to ensure security and clarity. A Memorandum of Understanding can be used while leasing assets like equipment, tools, machinery, etc. It can be used in small everyday transactions with businesses or corporations in the supply chain. It is ideal to use an MoA to secure a legal relationship in the following forms of business agreements:

  • Service contracts,
  • Joint Ventures,
  • Business partnership,
  • Contracts of employment.

Let us learn about each one in detail. 

Service contracts

A service contract is entered into between a business and its clients to provide services. A service contract can be made in the form of an MoA. An MoA will secure the terms and conditions of the service in writing. For instance, if you are the compliance manager of an interior design company, you could secure the work undertaken by the company’s sales team with the help of an MoA. This MoA shall specify terms and work as a legally binding agreement for providing services to the client. This ensures security for both the service provider and the client. The client gets security in terms of completion of work and the service provider gets security in payment requirements. A typical MoA for service providers should consist of the following clauses and information:

  • Name, address, contact details, and other details of the client
  • Name, address, contact details, and other details of the service provider
  • Services to be provided 
  • Payments to be made in exchange for service
  • Terms and conditions of work
  • Time and date of completion of work
  • Indemnification clause
  • Force Majeure clause 
  • Representative and warranties clause
  • Dispute resolution clause 
  • Confidentiality clause
  • It must be signed by the parties.

Joint Ventures

A joint venture agreement has been of significance and importance for a long time in the corporate world. Be it BMW Brilliance (JV agreement between BMW and Brilliance Auto Group), or Vistara (JV agreement between Indian corporate giant Tata Sons and Singapore Airlines), the form of joint venture agreements have been proved to be beneficial to corporations. These JV agreements can be secured using a Memorandum of Agreement. A joint venture is a combined business venture between two companies that come together in the pursuance of a common objective. Companies that form a JV agreement combine their businesses, resources, and tangible and intangible assets in fulfilment of the desired objective. Parties share the profits at a decided ratio while working on the common goal. A JV agreement can be contractual or by the creation of a new entity. It is mostly the contractual JVs that are appropriated using an MoA. This agreement must contain the following clauses and information:

  • Name, address, contact details, and legal details of both the business parties
  • Nature of the joint venture undertaken and the manner of its undertaking
  • A purpose statement or clause (objective clause)
  • Terms and conditions of the venture
  • Duties and responsibilities of both parties
  • Profit sharing ratio and manner of sharing
  • Compliance with accounting and meeting standards
  • Voting, quorum, and resolutions
  • Confidentiality clause
  • Time limits
  • Non-Compete clause
  • Termination and breaches
  • Force Majeure clause
  • Indemnification
  • Representations and warranties clause
  • Dispute resolution clause.

Business Partnership

Possessing similar features to a joint venture, a business partnership is a formal agreement between two businesspeople or an agreement for bringing together their business synergies. They then work together with a predetermined profit-sharing model. It is advisable to have this agreement in writing; hence, an MoA is recommended. Most of the time, business partnerships have witnessed differences and fallouts. In such a situation, if the agreement is made verbally and not put in writing, it causes further conflicts. An MoA plays a crucial role in mitigating the risk of litigation and also avoiding conflicts. This agreement shall specify the following details:

  • Information about parties and their businesses (name, address, affiliation, etc.)
  • Roles and responsibilities of both parties
  • Profit sharing model
  • Funding contributions
  • Business model
  • Contingent events, if any
  • Time specifications
  • Confidentiality clause
  • Termination and breaches
  • Force Majeure clause
  • Terms and conditions of the partnership 
  • Legal compliance
  • Dispute resolution clause 

Contracts of employment

A contract of employment or an employment contract is a legal agreement between an employee and the employing corporation (employer). It specifies the terms and conditions of  employment, establishes a legal relationship between the employer and employee, and also acts as proof of employment. Both the employee and the employer are bound by the terms and conditions specified in the agreement, and this provides transparency and a sense of security. The employee must adhere to employment terms and conditions while working, and the employer must fulfil his duties towards the employee, like specifying salaries, maintaining the provident fund, etc. An employment contract mitigates the risk of arbitrariness in an organisation. It shall contain the following clauses:

  • Description of the employee
  • Description of the organisation
  • Designation and salaries, etc., of the employee to be specified
  • Terms of employment 
  • Type of employment: full-time, part-time, contractual, project-based, internship, traineeship, etc.
  • Duties and responsibilities of the employee toward the corporation
  • Duties and responsibilities of the organization toward the employee
  • Exclusivity clauseemployer
  • Confidentiality clause
  • Non-Compete clause
  • Legal compliance: adherence to employment laws.

Acquihire transactions

As the name suggests, an acquihire is a form of acquisition that is ultimately done for the purpose of hiring. It is a relatively new concept in the world of mergers and acquisitions where the acquirer company neither merges nor acquires the entire business of another company (target company). Instead, the acquirer company only acquires the employees of the target company. This could be for a particular project on a temporary basis or entirely for the purpose of employment. Since it is not entirely an acquisition, the acquirer company can skip the legal implications and regulatory compliance. But that does not render it risk-free. An acquihire possesses the potential risk of spat or misunderstanding at any point of transaction. Since it skips the regulatory compliances, it becomes even riskier in case of conflicts. In this situation, the acquihire transaction can be facilitated with the help of the Memorandum of Agreement. This will make the transaction legally binding. It will create a clear and transparent legal relationship involving consent, in writing. An MoA for an acquihire transaction shall contain the following information and clauses:

  • Description of the employee
  • Description of the acquiring organisation
  • Designation and salaries, etc., of the employee to be specified
  • Terms of the acquihire transaction
  • The time period of acquisition or employment
  • Type of acquihire: temporary/permanent/project-based
  • Duties and responsibilities of the employee toward the corporation
  • Duties and responsibilities of the organisation toward the employee
  • Confidentiality clause
  • Non-Compete clause
  • Necessary legal implications. 

Major sections of a standard Memorandum of Agreement (MoA)

An MoA typically contains the following components in it:

1. Purpose and Scope

This portion helps determine the intention of the parties. It specifies the reason for entering into the MoA and its expected outcomes. The purpose statement also includes information such as the description of the parties, financial obligations of the parties, the relationship established between the parties, and the important dates of the MoA.

2. Background

This portion gives a brief overview of the parties, their corporations, and the business ties they are entering into. It also describes any previously applicable or ongoing agreements between the parties, if there are any. 

3. Responsibilities under this MoA

This is an important portion of an MoA as it specifies all the duties and responsibilities of both parties under the agreement. It is advised to keep this portion, especially concise and transparent, in an agreement as it enhances clarity and also helps avoid conflicts.

4. Funding

Funding is to be determined and written in the MoA. Funding includes the financial obligations that each party promises to assume in furtherance of the common objective.

5. Effective Date and Signature

The written MoA is required to be signed by both parties to give it validity and legal recognition. An MoA must also specifically mention the date from which it shall be effective, the duration for which it shall be in force, and the estimated/expected date of completion for the joint agreement.

Drafting a Memorandum of Agreement

As a law student or a lawyer, drafting is essential. A well-drafted document can be game-changing and life-altering for many. As the article focuses on the importance of an MoA in business transactions, it is crucial to know the proper way of drafting it. This portion of the article is to provide insights and better understanding to law students or lawyers wanting to draft a Memorandum of Agreement. Mentioned below is a stepwise guide to drafting an MoA effectively:

Knowing the parties:

For drafting an MoA, a lawyer has to first meet and understand the parties properly. It is essential to understand the needs and expectations of each party in detail. The same is incorporated into the Memorandum of Agreement. 

Drafting and review:

A rough draft has to be prepared after gaining a fair understanding of the parties’ requirements. The lawyer must run the draft through the parties and seek changes. All terms and conditions specified in the contract have to be explained to the parties. The lawyer should ensure legal compliance and regulatory compliance. The agreement must not contain anything that is legally disqualified. This stage involves all necessary negotiations. 

Final draft: 

After reviewing and confirmation by both parties and related stakeholders, a final draft is prepared that is legally compliant. This is sent to both parties for finalisation. 

Signing the agreement:

After every compliance is recognized and the parties have completely understood the terms and conditions, it is now signed by the parties. This is the final stage, and the agreement is now binding on the parties to it.

Sample Memorandum of Agreement

Here is a sample of the Memorandum of Agreement for a complete understanding of the readers. 

Memorandum of Agreement

Between (Party A) and (Party B)

  1. PURPOSE

(i.) This Memorandum of Agreement, hereinafter called “Memorandum” dated _________ shall act as a legally binding agreement between Mr. ABC / ABC company, hereinafter called Party A, and Ms. XYZ / ZYZ corporation ltd., hereinafter called Party B.

(ii.) Party A is _____ by profession, residing at ______, having registered office at ______.

(iii.) Party B is _____ by profession, residing at ______, having registered office at ______.

(iv.) For reference in this Memorandum, Party A and Party B shall be called “Parties” collectively. 

The Parties have come together in association to be called “Partners” by this Memorandum and shall work in good faith towards one another in furtherance of the common objective. While doing so, the parties shall abide by the following clauses:

  1. OBJECTIVE / GOAL
[Mention the purpose (business intent) for entering into the MoA.]

The parties have collaborated through this memorandum to undertake the following objective:

______.

  1. COLLABORATION

Specify the areas in which the parties shall contribute together / the work to be undertaken together.  

The parties shall contribute to the common desired goal of ____ in the following manner:

Party A:

  1. ____
  2. ____
  3. ____

Party B:

  1. ____
  2. ____
  3. ____
  4. DUTIES AND RESPONSIBILITIES 

Party A shall fulfill the following duties and responsibilities towards the common objective:

  1. _____
  2. _____
  3. _____
  4. _____
  5. _____

Party B shall fulfill the following duties and responsibilities towards the common objective:

  1. _____
  2. _____
  3. _____
  4. _____
  5. _____

V. ASSETS

The parties agree to contribute the following tangible and intangible assets, workforce, and machinery toward the common objective:

Party A:

  1. _____
  2. _____
  3. _____
  4. _____

Party B: 

  1. _____
  2. _____
  3. _____
  4. _____

VI. FUNDING AND RESOURCE ALLOCATION

The parties shall contribute to the business venture in the following manner to the following amounts (in figures or in percentage):

Party A: ______

Party B: ______

VII. PROFIT-SHARING MODEL

The parties shall receive a divided allocated share of profits (in percentage) for each financial year / project-based profits:

Party A: ______

Party B: ______

VIII. FORCE MAJEURE

In the event of the happening of an event beyond the control of parties (eg. COVID-19 pandemic), the parties shall be exempted from liability and take responsibility to the extent and manner as:

Consequences of the occurrence of a force majeure event:

Managing risk:

Compensating damage (manner or percentage):

Payments:

Termination period (sunset clause):

IX. AMENDMENTS

(i.) The Memorandum shall be in effect from the date of signing it, i.e., ______. 

(ii.) The Memorandum shall be valid for a period of _____ / till ______.

(iii.) Termination before the specified date shall not be invalidated or be a ground for litigation if the termination is for grounds specified in the Memorandum.

(iv.) Amendments shall be allowed to be made to this Memorandum only on written and signed consent of both parties. 

(v.) The Memorandum can be renewed beyond the period specified, for reasons to be stated in writing. This shall be done after the due signature of both parties’ consent. 

(vi.) The amendments shall be binding on both parties as much as the Memorandum. The Memorandum and its amendments shall be applicable to every individual in both parties’ organizations just as they are applicable to the parties. 

X. ENTIRE AGREEMENT

(i.) This Memorandum shall be treated as the final understanding to both parties.

(ii.) The Memorandum shall be legally binding and enforceable.

(iii.) The Memorandum shall supersede any previous agreements or contracts, written or verbal. 

XI. TERMINATION 

(i.) The Memorandum shall be liable to be terminated on account of breach of any clause herein mentioned in this agreement. 

(ii.) Additionally, the Memorandum shall be terminated on the following grounds: 

  1. _____
  2. _____
  3. _____
  4. _____
  5. _____

XII. DISPUTE RESOLUTION

(i.) In the event of arising any dispute between the parties, the parties shall make the first endeavour to resolve disputes amicably through one-on-one discussions. 

(ii.) If parties fail to resolve the issue, they shall seek help from negotiation/mediation/any other form of alternate dispute resolution with help of a legal expert. 

(iii.) Parties under this clause do not in any way waive their right to seek legal enforceability in any court of law. 

This Memorandum shall be effective as signed and sealed from this day of _____, 20__ and shall be binding on both parties.

Party A (Name)

__________________ (signature and seal with date)

Party B (Name)

__________________ (signature and seal with date) Place:

Interrelation between Memorandum of Agreement, Memorandum of Understanding, and a contract

A Memorandum of Agreement is similar to a Memorandum of Understanding in some terms and to a contract in others. The three documents can be frequently used interchangeably, with variations as per the needs of the situation. A Memorandum of Agreement is similar to a Memorandum of Understanding and a Contractcontract in the following manner:

  • MoA, MoU, and contracts all determine legal relationships between two parties. 
  • An MoU is a simple form of document that is undertaken by parties to ensure that both parties agree to the same manner, terms, and objectives. It ensures clarity. An MoU is not legally binding and enforceable. However, an MoU can be made legally enforceable with the intention and consent of the parties.
  • An MoA is a comparatively more comprehensive document than an MoU as it details the terms and conditions. It specifies the roles, responsibilities, and duties of the parties to the agreement. It creates a comprehensive legal relationship between the parties. An MoA is legally binding and can be legally enforced in situations of breaches or disagreements.
  • A contract usually follows or replaces an MoA. It is a detailed legal agreement mentioning all the bits and pieces of the joint business arrangement and its legal implications. A contract is legally binding and legally enforceable. 
  • An MoA adheres to the Indian contract laws because of its nature of legal enforceability. A contract also abides by the requirements and essentials of the Indian Contract Act of 1872.  
  • An MoA and MoU differ from a contract in a manner that an MoA and MoU do not involve elements like offer, acceptance, and consideration. An MoA and MoU are entered into with mutual consent and understanding for a shared business venture. 
  • An MoA and MoU must be in writing. A contract, on the other hand, could be written or verbal, expressed or implied. 
  • An MoU is usually a general statement of common goals. It does not involve any sharing or allocation of funds and resources. An MoA usually involves fund allocations. A contract involves considerations and payments. 

Conclusion

A Memorandum of Agreement is a legally binding document establishing a legal relationship between the parties to it. It is essential in ways that it secures conditional agreement between parties, provides transparency and security, and protects against misuse and fraud. It defines the specific obligations of parties to it and also provides clarity on monetary requirements. A properly drafted MoA can save your day more than you can think of, and a carelessly drafted MoA can prove to be more harmful than imaginable. One must choose wisely, the attorney, the words of agreement, and the promises in the form of obligations. 

Frequently Asked Questions (FAQs)

What is the difference between a Memorandum of Agreement and a Memorandum of Understanding?

The most basic difference between a Memorandum of Agreement and a Memorandum of Understanding is their nature of being legally binding. A Memorandum of Agreement is a legally binding document, but a Memorandum of Understanding is not legally binding. 

Can a Memorandum of Understanding be enforced in court of law?

Generally, the Memorandum of Understanding is not a legally binding document. However, it can be made so with the consent and intention of the parties. The parties must be competent to contract under the Indian Contract Act of 1872, and the Memorandum of Understanding must fulfill the essentials of a valid contract under the Indian Contract Act of 1872.

What is a Memorandum of Agreement and a Memorandum of Understanding otherwise known as?

The Memorandum of Agreement is also known as a conditional agreement, and a Memorandum of Understanding is known as a common-clauses agreement. 

How long can a Memorandum of Agreement be valid?

A Memorandum of Agreement shall be valid as long as the parties intend to and specify in the agreement. It can also be extended beyond the written time period with the consent and signature of both parties. 

Can a party stop being a party to the Memorandum of Agreement?

A party or both parties to an MoA can terminate the MoA if and when it satisfies the established grounds for termination of the agreement, or on reaching the end of the business venture goal. An MoA naturally comes to an end on the specified last date of its being in effect.

What are the benefits of having a Memorandum of Agreement?

Some benefits of having an MoA drafted are :

  • It enhances transparency and leaves no room for uncertainty.
  • It helps understand the aims and objectives of both parties better.
  • It provides legal security for future transactions. 
  • If a party wishes to terminate the mutual agreement, it is easy to do so because of the existence of an MoA. 

References


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