This article is written by Daisy Jain and Shraileen Kaur. This is an exhaustive article that deals with the memorandum of understanding. This article also discusses the requisite clauses of an MOU and the landmark cases dealing with MOU. In this article, the author discusses in detail a memorandum of understanding, its features, purpose, types, scope, significance, and essentials.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction  

A Memorandum of Understanding (“MOU”) is one of the contracts that are frequently exchanged during contract talks, but what an MOU actually entails varies greatly. These agreements can occasionally be fully binding and bind the parties to uphold the agreed-upon obligations. In other instances, they are declarations of the parties’ intention to continue their conversations along the grounds outlined in the document, and they are not binding on any party. Sometimes they are contracts that only come into force if certain other things happen. Sometimes they are an ambiguous mixture of all three, and the parties are unable to distinguish between them. 

To understand MOU, we can go through an example, to begin a business partnership, a manufacturer and a supplier may create an MOU outlining how they would cooperate to meet their shared objectives. Prices and product standards do not need to be settled upon yet. They might later sign a supplier agreement that specifies the price and details of the requested goods. An MOU is specifically a negotiation including their common goals before entering into a written agreement. 

Suppose you went on a solo trip to a tribal location where you got an opportunity to do scuba diving. Knowing about the opportunity, you instantly got attracted and communicated with the concerned person for other requisites. During the conversation, you couldn’t understand the language of the locality. Despite this, you paid a hefty amount and went scuba diving. The moment you went into the water, you realised that there were numerous carnivorous animals ready to make you their dinner. The other moment you realised that the safety equipment was not working properly. Ever wondered, if such a situation arises what will be your course of action? 

Well, to avoid such a situation in real life, the concept of a memorandum of understanding was introduced. It acts as a bridge between the parties and allows them to specify their objectives and expectations. If the parties before entering into the contract have any dispute or disagreement, it can be resolved with the help of the clauses mentioned in the memorandum of understanding. 

A memorandum of understanding is an agreement that is considered a preliminary step taken by the parties in favour of initiating a contract that will be legally binding. Prior to the contract, this agreement helps the parties to demarcate a line concerning roles and responsibilities. Unlike a contract, which can be legally enforced, a memorandum of understanding is an agreement that may not be legally binding to the parties and cannot be necessarily enforced in a court of law. 

What is a Memorandum of Understanding

Have you ever seen a contract that all the parties to the transaction have signed but that is not enforceable against any of them? A Memorandum of Understanding (MOU) is the name of this document. It comprises the parties’ declarations of their intentions in relation to a transaction or an agreement. MOUs are the best option when a transaction is in its early stages and the parties just want to express their intentions in writing rather than immediately create a legally enforceable contract. As a ‘negotiating starter’, it provides the parties more time to fully comprehend all of one another’s terms and conditions. Furthermore, parties frequently seek to participate in MOUs to find a resolution before investing a significant sum of money in a due investigation, hiring top law firms, or even starting the financing process. 

A Memorandum of Understanding is described as “a written statement expressing the initial agreement of parties who plan to engage into a contract or some other agreement; a noncommittal writing preliminary to a contract” in the Black’s Law Dictionary. Additionally, it notes that the MOU is not intended to be legally binding and that the parties are free to negotiate with other parties. Courts rarely enforce MOUs since business persons normally do not intend to be bound by them, although on occasion they do because they discover that a commitment has been made.

A memorandum of understanding refers to an agreement that specifies the terms and conditions agreed upon by the parties involved. It is a legal document outlining the roles, responsibilities, and courses of action of the parties. The signing of a memorandum of understanding usually gives rise to a commercial relationship between the parties. It acts as a governing body for certain types of business-related relationships. 

Businesses prefer entering into a memorandum of understanding to- 

  • Ensure proper coordination and cooperation between the parties involved;
  • Enter into a partnership for a particular project;
  • Enter into a venture for a short period;
  • and to ensure that interdepartmental and intradepartmental work is going on smoothly. 

A memorandum of understanding is considered a less formal agreement as compared to other agreements and contracts. They are always initiated before entering into a contract.

Although the memorandum of understanding is not binding to the parties, it serves as a cornerstone when the parties are negotiating before entering into a contract. 

Requisite clauses in an MOU

In general, an MOU is a representation of the parties’ intentions with regard to a specific trade, transaction, or objective. It is crucial that the MOU’s goal be made very apparent. The MOU should carefully design the following terms to ensure that it is clear what each party intended:

  • Parties: All parties’ names and contact information, including identity documents and addresses for authorized signers.
  • Recitals: The MOU’s goals and the parties’ backgrounds.
  • Intent to make MOU legally binding: The parties have the option of highlighting their intention to make the MOU legally binding right from the start.
  • Work scope: To ensure that there is no room for misinterpretation, the parties must restrict the MOU’s application specifically to the specific transaction.
  • Consideration: Money may or may not be used as payment for either party’s consideration; in either case, the parties must specify how payment for either party’s consideration will be made. if it will be at a fixed price or on a commission basis. Also clarified will be the specifics of each party’s tax obligations.
  • Confidentiality: Confidentiality is the most important factor for all parties because they will be sharing sensitive information without even making the MOU legally enforceable. To maintain the confidentiality of sensitive information, this clause must be properly written.
  • Roles and duties: Clearly describe each party’s agreed-upon roles and responsibilities to ensure that everyone knows what they are expected to do and what they are not expected to do. The duties and responsibilities should be in line with the MOU’s objectives, work scope, and accomplishment of predetermined objectives.
  • The tenure and termination: The terms of this MOU must be mentioned by the parties. After the MOU’s first term expires, they might discuss the possibility of an extension or renewal. Additionally, they must list the circumstances under which they may end the MOU, such as (i) bankruptcy or liquidation, (ii) failure to execute under the MOU, etc.
  • Dispute resolution: There is a risk that there could be disagreements, controversies, or breaches; therefore, it is essential to add this provision to quickly resolve any disagreements through dialogue.
  • Exclusivity: This clause is typically not included in MOUs, and it is up to the parties to decide whether they want to reach an agreement with additional parties. Nevertheless, the parties may incorporate an exclusivity clause if they choose to prohibit anyone from making proposals to or negotiating with one party’s rivals for a predetermined amount of time.
  • A consenting signature: All parties need to sign the MOU, and in the case of organizations, the signatories must have official authorization to sign on the organization’s account.

Latest examples of MOUs

Moderna signed an MOU to provide the African Union with up to 110 million doses of the COVID-19 vaccine.

In order to conduct research projects, the University of Newcastle in the United Kingdom and the Indian Institute of Technology, Patna (IIT-P), signed an MOU.

With the goal of empowering local companies and Self-Help Groups (SHGs) by integrating them into the e-commerce space, Flipkart signed an MOU with the Ministry of Rural Development (MoRD) of the Indian government.

With the Indian Navy, Axis Bank signed an MOU giving a pay package for military service.

In order to purchase a 51 percent stake in Monday Swiss UK Ltd., a renowned European developer, and producer of cutting-edge plant-based food substitutes, Zoglo’s Incredible Food Corp. agreed to a legally binding MOU. The non-binding letter of intent (LOI) to purchase a 50.5 percent shareholding is superseded by this MOU. “Following rigorous due care of Monday Swiss, we feel secure entering into a binding MOU,” declared Zoglo’s CEO.

To increase the use of biomass in its manufacturing processes, UltraTech Cement signed a non-binding MOU with Punjab Renewable Energy Systems (PRESPL), India’s largest biomass aggregation and densification company.

Benefits of using an MOU

  • The basis for a legitimate contract – The MOU serves as the framework for a future, legally binding, final contract by outlining the parties’ intentions for entering into an agreement as well as their duties.
  • Lessen the uncertainty – The best technique to reduce ambiguity between the parties and achieve consensus ad idem, or a meeting of the minds, is through written communication. MOUs are a simple way to formalize agreements without committing to them legally.
  • A secure alternative – MOUs are typically viewed as a safer alternative by government corporations, particularly when significant deals are being planned.
  • Headstart for negotiations – MOUs give parties an advantage when starting the deal, revising the terms and conditions, and negotiating on important issues.
  • Time to conclude – By signing an MOU, parties are given enough time to decide whether or not they wish to make their purpose a legally enforceable commitment.
  • Affirms parties’ intentions – Understanding the other party’s intentions in full is essential for efficient communication and contract closure. Once the parties sign a non-binding MOU, their intentions for the transaction become clear, and this results in the agreement being closed by either turning the MOU into a contract or negating it.

Disadvantages of using an MOU

  1. Increased chances of litigation – Its unclear structure may cause disagreements between the parties and, if those disagreements are not resolved through negotiation, then litigation comes into play.
  2. Not legally binding – Parties who are unwilling to fulfil their obligations under an MOU have the opportunity to easily leave the agreement because it is not legally enforceable. If the opposite party cannot demonstrate that the MOU was legally binding, it cannot even make a claim for damages.
  3. Propensity to false claims – The MOU notion has a flaw that might make it binding or non-binding, depending on the parties’ intentions. For instance, if it is stated in the MOU that it is a non-binding MOU and one party complies with its obligations and asserts that it is legally binding, the other party may view the MOU as nothing more than a statement of intent to enter into a transaction. In such a situation, the MOU’s language will be taken into account before deciding whether or not to implement it. As a result, there are many various arguments that can be made about the binding character of an MOU.

Need/importance of MOUs

  • MOUs are the first step toward legally binding contracts and can be signed by parties who are ready to develop a connection and cooperate before signing a contract. 
  • The parties choose an MOU over a contract because it is easier to understand, less complicated, and takes less time to complete. 
  • This official agreement (MOU) is less complicated than other options, making it a practical choice for the parties. Therefore, an MOU is always recommended when the parties want to prevent any potential legal repercussions before forming binding contracts.
  • It enables all parties involved to clearly define their objectives. This lessens misunderstandings and removes the chance of unforeseen conflicts in the future.
  • The MOU may serve as the foundation for the upcoming contract. If there is ever any doubt, it can also be used as a reminder of the parties’ goals and intentions.
  • It enables parties to exchange sensitive information securely. This paper is especially useful when forming partnerships.
  • However, as that sort of agreement is not legally enforceable at the MOU stage, it can readily be terminated if any party thinks that its aims and purposes are not being accomplished. 

Purpose of a memorandum of understanding

Despite not being legally binding on the parties involved in the agreement, the memorandum of understanding serves multiple purposes – 

  1. Setting out a plan and structure for future negotiations.
  2. It facilitates parties in decision-making regarding the venture.
  3. It imposes the necessity of establishing major financial parameters prior to entering into a formal contract.
  4. Additionally, it assists a third party in comprehending the main idea or purpose of the project.
  5. It helps in determining the roles and responsibilities of the parties.

There are multiple sectors that use a memorandum of understanding. Some of these sectors are as follows – 

Private and public enterprises

A memorandum of understanding plays a prominent role in the operations of private as well as public enterprises. These enterprises use a memorandum of understanding to get into an agreement with certain organisations where there is no legal binding. A memorandum of understanding for public and private enterprises usually includes the roles and responsibilities of both parties along with the details of the negotiation that took place between the parties. 

Government in India and other countries

A memorandum of understanding is a major component not just in India but also in countries around the globe. Numerous times, various nations come together for a particular cause and sign a multilateral memorandum of understanding that helps them operate smoothly and work for the welfare of the people.

Public international law

Memorandum of understanding plays a prominent role in public international law. They are categorised as treaties on a global platform. Under public international law, when such treaties are signed, they should be reviewed by the United Nations Treaty Collection. On the international platform, the memorandum of understanding expressly mentions the intent of the parties and the position of the signatories. According to the discretion of the signatories, a memorandum of understanding at the international level can be legally binding. 

Difference between MOUs and contracts

Parameters Memorandum of Understanding Contract 
Legality Not legally enforceable Legally enforceable
Registration Registration of an MOU is not requiredCertain contracts need to be registered in accordance with the law. 
Granting of rights An MOU does not give parties significant rights over one another.It gives both parties significant, enforceable rights.
Specific performanceAn aggrieved party cannot claim for the specific performance.The contract’s parties have the right to seek specific performance.

Difference between a Memorandum of Understanding and a letter of intent

BasisMemorandum of understandingLetter of Intent 
Meaning A memorandum of understanding is a legal document that states the terms, conditions and purpose of the arrangement between the parties.A letter of intent is a document which states the intention of the parties involved.
Involvement of parties A memorandum of understanding can be multilateral or bilateral,  there can be two or more than two parties involved in the agreement. A letter of intent is a legal document that involves only two parties. 
Enforceability A memorandum of understanding is not enforceable in a court of law. However, it depends on the words drafted in the memorandum of understanding. A letter of intent is not legally enforceable in a court of law. However, if the terms of the document indicate legal binding, the same shall be upheld by the court. 
Elements and SignatoriesA memorandum of understanding entails the purpose, role and responsibilities of the parties involved.  it is signed by all the parties that are involved in the agreement.A letter of intent is a legal document that states all the terms, and conditions and expressly defines all the terms that have been agreed upon by the parties. However, a letter of intent is signed by the party who initially forwarded the proposal. 
ApplicationA memorandum of understanding is used to expressly mention the framework under which parties in the agreement will work together. Such a memorandum of understanding is often in the form of a joint venture or partnership.A letter of intent is used to expressly state all the terms that have been agreed by the parties prior to signing the contract.
ConsequenceOnce the memorandum of understanding has been signed both the parties involved in the agreement are under certain obligations to perform the task. The memorandum of understanding ceases to operate after the date of expiration. Generally, parties use a memorandum of understanding as a primary step toward a contract. A letter of intent is a legal document that can, later on, be converted into a contract.  However, the scope of a letter of intent is limited as compared to a memorandum of understanding. 

When can an MOU be used

Given that an MOU is not even legally binding, you might be asking why anyone would go through even the slightest effort of drafting one. In the following circumstances, signing an MOU instead of an agreement makes more sense:

  • MOUs are preferred by ministries, government departments, and statutory bodies as a safer alternative to entering into direct contracts with the opposite party.
  • Government corporations tend to enter into MOUs to lay out the transaction’s goals, set benchmarks, and assess success at the conclusion.
  • MOUs are treated like treaties in international agreements.
  • To encourage conversation in high-stakes transactions.
  • MOUs are used to formally bind universities, unions, schools, and other entities in the transactions.
  • Research projects, collaboration, and organizing events.

Difference between MOU AND MOA

Memorandum of Understanding 

To make sure that all parties are on the same page, an MOU is a document that outlines general ideas, such as shared objectives and procedures. It can include the broad elements of the agreement, such as the cost, the deadlines, the method of resolving disputes, and the topic matter. MOUs frequently contain language emphasizing that the agreement is not meant to have legal force. MOUs are typically used to check that the parties are in agreement rather than to guarantee the completion of a particular activity.

Memorandum of Agreement 

An MOA is a comprehensive commercial document that lays forth a shared goal between the parties. In order to permit the parties to have a meeting of minds and agreed terms, MOAs are developed prior to a more thorough contract. Businesses or organizations can utilize MOAs to formalize their agreements and show that the parties are on good terms. An MOA’s provisions may specify the particular duties and steps that each party will take to accomplish the specified goal.

The legality of the memorandum of understanding

A memorandum of understanding is not always enforceable in court, as was already established. It is crucial to comprehend its legality as a result. Often referred to as a “softer” document, an MOU. An MOU is the best choice when searching for a short-term fix. It is a document that outlines the parties’ intentions with regard to a project. It does not, however, demonstrate the parties’ intention to enter into a binding deal, unlike a contract. As a result, it cannot be enforced in court. The MOU’s drafting primarily determines whether it will have legal force or not. The MOU may be enforceable in a court of law if a lawyer took care to add specific terms or phrases that reflect the whole intention of the parties to make the MOU legally valid.

Depending on the intent behind its creation, a memorandum of agreement can eventually become enforceable in court. For instance, an MOU becomes legally enforceable on the parties if it is set up for consideration or in exchange for money. If one of the parties to the Memorandum of Understanding (MOU) has suffered a loss because the other party violated the MOU, only that loss may be recovered from the party by providing the MOU as evidence. The MOU itself does not become legally enforceable as a result of this, nevertheless. There is still much to learn about the legalities of MOUs. In order to be able to enforce their contracts, it is therefore advised for the parties to acquire a legal agreement.

Legal validity of the Memorandum of Understanding

A Memorandum of Understanding reflects the agreement between parties over a certain business or activity they desire to work on. But the mere fact that a document exists in relation to an agreement struck between the parties does not automatically imply that it is a contract. Every agreement is not a contract, according to the Indian Contract Act of 1872. Contracts that can be enforced in court only include those that are enforceable by law. Therefore, the question of whether an MOU is enforceable in India arises. In India, a contract is legally enforceable when it fulfils all the essential requirements mentioned under Section 10 of the Indian Contract Act, 1872. The following are the essentials to making an agreement into a legally binding contract: 

  • An offer from one party must be accepted by another.
  • The parties’ assent must be freely given and unaffected by pressure, deception, or undue influence.
  • To enter into a contract, both parties must be of legal age. This requires that they be over the age of 18, be of sound mind, and not be insolvent or bankrupt.
  • There must be a matter of consideration.
  • You need a legal object.
  • There must be a desire to establish legal relationships.

An MOU must fulfil the aforementioned requisites to be legally enforceable. 

Enforceability of the Memorandum of Understanding

The Indian Contract Act, 1872 governs MOUs, and if its requirements are met, the Specific Relief Act, 1963, which grants specific relief where compensation cannot be determined in monetary terms, may be used to compel an MOU’s performance. The MOU is not recognised as a legally binding contract if the requirements of the Indian Contract Act, 1872, are not met. However, on the basis of promissory estoppels and equity concepts, it can still be enforced in a court of law.

Steps to writing a Memorandum of Understanding

While drafting a memorandum of understanding, the individual needs to know about the content to be mentioned in the agreement as well as the needs of the parties involved in the agreement. The essentials which must be included in a memorandum of understanding have already been mentioned in the heading above. Here are the steps that an individual can follow to write a perfect memorandum of understanding that fulfils the needs of both parties. For a better understanding of the steps mentioned below, a sample memorandum of understanding is attached in the article.

Collection of data 

The first and foremost thing that an individual must do before drafting a memorandum of understanding is to collect the information from both parties. The information to be collected from both parties include – 

  • Name of the parties
  • Address of the parties
  • Contact information of both the parties
  • Representatives appointed by the parties
  • Negotiations done by the parties

Listing down the information 

Before drafting the agreement, it is important to note down all the major points that have been agreed upon by the parties. The memorandum of understanding must entail the following – 

  • An outline of what a future contract would look like
  • Roles and responsibilities of the parties
  • Terms and conditions
  • Other relevant details regarding the agreement
  • Date of commencement of the agreement and the expiration of the agreement 
  • Consideration

Organising the information and drafting the agreement

Once all the relevant information is listed down, the noted information should be organised in such a manner that it is clear, concise, and free from ambiguity. While drafting, a person can also take references from the templates available on the internet. However, this does not mean relying solely on the templates. At this stage, the person drafting the memorandum of understanding must create the headings as well as subheadings to organise the information and make it more clear and concise.

Proofreading

After drafting the agreement, it is essential to proofread the agreement to get rid of any grammatical errors and any unnecessary scope provided to either party. An agreement is said to be a good agreement only if it has the least possibility of any future dispute. To avoid any future dispute, the drafted agreement should be read at least thrice. 

Presentation to the parties

Once the agreement is drafted and proofread, it should be presented to the parties involved in the agreement. In case any changes are proposed by the parties, the same shall be adhered to. Once all the changes are made, the parties involved in the agreement should sign the agreement along with stating the date on which it was signed.

Is a Memorandum of Understanding legally binding

Generally, the memorandum of understanding is not legally binding. However, the nature of a memorandum of understanding can only be determined after going through the clauses mentioned in the agreement. Normally, the courts interpret the binding nature of the memorandum of understanding by looking into the language that has been used while drafting these legal documents. 

While drafting an agreement, if an individual wants to create a binding nature of the document, he or she can include several causes, such as a dispute resolution clause, a confidentiality clause, and various other clauses that create such legal enforceability. 

In case a party to the agreement breaches any of the legal obligations mentioned in the agreement, the other party is free to approach a court of law against the defaulting party. 

Considering the laws prevalent in India, the memorandum of understanding is not legally binding in a court of law. However, it can be legally enforced if such a legal document fulfils all the elements mentioned in Section 10 of the Indian Contract Act, 1872. The elements mentioned under Section 10 of the Indian Contract Act 1872 are as follows –

  • The memorandum of understanding should be entered with the free consent of the parties involved. There should not be any coercion or undue influence. 
  • Proper offer, as well as acceptance, should be present in the memorandum of understanding.
  • One of the most important elements that determine the nature of the memorandum of understanding is intention. The intention of both parties should be expressly mentioned in the agreement. To make the contract legally binding, the intention of the parties should be to draft a memorandum of understanding which creates a legally binding relationship. 
  • The parties to the agreement should be competent to do so. The parties entering into the contract should be over the age of 18 years, have a sound mind, as well as be solvent. 
  • The object of entering into a memorandum of understanding should be lawful, and the consideration involved should also be lawful. 

However, the legally binding nature of the memorandum of understanding is not the same in other countries. For instance, in the United States of America, a memorandum of understanding is the same as a letter of intent. Hence, the High Court of Australia came up with a solution to this in the case of Masters v. Cameroon (1954). In this case, the court identified that there are 3 categories in which a memorandum of understanding can be categorised on the basis of its nature. 

First category

The first category of memorandum of understanding is binding in nature. As per the first category, the parties have already agreed to be legally bound by the memorandum of understanding, but they want to elaborate on the details and make the agreement more thorough and detailed.

Second category

The second category of memorandum of understanding is also binding in nature. This category of memorandum of understanding includes contingency. As per this category, the enforceability of the memorandum of understanding is contingent on the occurrence of a specific event, although the parties have consented to be bound by it.

Third category

The third category of memorandum of understanding is not binding on the parties. However, once a formal agreement has been executed, the parties involved in the agreement are bound by the terms mentioned by the government. 

Types of Memorandum of Understanding

The memorandum of understanding is of two types. These two types are as follows –

Bilateral memorandum of understanding

As the name suggests, a bilateral memorandum of understanding is a legal document signed at the preliminary stage of engagement between two parties. Such an agreement can only be made when there is the involvement of two parties. Instead of expressing a binding legal obligation, it indicates a consensus of the parties’ intention and a planned course of action. 

For instance, a memorandum of understanding was signed between Israel and Morocco regarding intellectual property.

Multilateral memorandum of understanding

A multilateral memorandum of understanding refers to a legal document that is signed between more than two parties. It is an agreement that involves more than two parties who are coming together to work on a particular project.  

For instance, a memorandum of understanding was signed between the Securities and Exchange Board of India and the International Organisation of Securities Commission. 

Landmark case laws

Jyoti Brothers v. Shree Durga Mining (1956)

Facts

In this case, a memorandum of understanding along with a contract was signed between the parties. Later on, due to a conflict of interest, differences arose between the parties, and they approached the court for relief.

Issues

  1. Whether a contract and a memorandum of understanding exist together at the same time and for the same purpose?
  2. Whether the intention of the parties while drafting a memorandum of understanding has to be the same? 

Judgment 

In this case, the High Court of Calcutta held that in case of a question on the enforceability of the memorandum of understanding, the intention of the parties should be interpreted by the court. The court must interpret the degree of understanding between the parties while signing the agreement. The court stated that a contract, as well as a memorandum of understanding, can not exist together. The presence of one will invalidate the presence of another. 

However, the decision in the case was overturned in the case of Kollipara Sriramulu v. T. Aswathanarayana & Others (1968). In this case, the court held that a contract and a memorandum of understanding can coexist. The existence of a contract will have no impact on the assistance of a memorandum of understanding. Both of them would be considered legal.

Subimalchandra Chatterji v. Radhanath Ray (1933)

The Calcutta High Court held that an MoU is enforceable according to general equity rules. Equity makes parties to a contract, even one that doesn’t quite meet all the legal requirements, bound by its terms.

Structural Waterproofing & Ors. v. Mr. Amit Gupta (2001)

The Delhi High Court ruled that “the Memorandum of Understanding, which is otherwise legal, should be implemented and parties should be bound by the conditions and order of the MoU,” in the lack of proof of force or deception.

State of Orissa & Ors v. Titagar Paper Mills Company Ltd. & Ors

According to the Supreme Court’s verdict, it is evident that the nomenclature and explanation given to a contract are not indicative of the underlying character of the instrument or of the transaction covered therein. However, these must be determined by considering all of the terms and MoU provisions in the instrument, along with all of the rights and effects resulting from them, rather than by selectively choosing particular clauses.

Millenia Realtors Private Limited v. SJR Infrastructure (Private) Limited (1985)

The Karnataka High Court held that Memorandums of Understanding (MoUs) are competent for enforcement, and should not be seen as contingent contracts.

Kollipara Sriramulu v. T. Aswathanarayana and Ors (1968)

A simple mention to a forthcoming formal contract will not prohibit a binding deal between the parties,” the supreme court ruled. The existence of a legally binding contract is not prevented by the parties’ reference to the readiness of an agreement by which the terms of consent are to be formalized.

Georgian Windpower Corporation et al v. Stelco Inc. (2012)

Facts

In this case, the two parties signed a memorandum of understanding for 2 years. The agreement was entered into for the development of a wind energy plant at the site of Stelco Inc. However, before the expiration of the agreement, Stelco Inc. terminated the agreement, breaching the terms mentioned in the agreement. 

Issues

Whether a memorandum of understanding is legally enforceable in case the same is not mentioned in the agreement? 

Judgment

In this case, the Ontario Supreme Court of Justice held that the termination of the agreement before the expiration of a two-year term by the defendant was wrong. However, the legal enforceability of the agreement was questionable. The Court further stated that while drafting a memorandum of understanding, both parties should make sure that they expressly mention which clauses of the agreement are legally enforceable and which are not. Later on, the court awarded damages for wrongful termination to the plaintiff.

Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Others (2006)

Facts

In this case, a memorandum of understanding was signed between the parties for the distribution of beverages. But a dispute arose between the parties regarding the distribution of profit. The letter on the matter reached the apex court.

Issues

Whether the parties to the agreement in title to the profit that is resulting from the memorandum of understanding? 

Judgment 

The Supreme Court in this case held that if the parties involved in the agreement fulfil all the terms and conditions mentioned in the agreement, the parties are entitled to the profit resulting from the memorandum of understanding. The court further stated that the legal binding of the memorandum of understanding depends on certain factors, such as the intention of the parties involved, the language used while drafting the agreement, and the nature of the legal document. While the memorandum of understanding is operational, the conduct of the parties also plays a prominent role in determining the enforceability of the memorandum of understanding. 

Bikram Kishore Parida v. Benudhar Jena (1975)

Facts

In this case, a question was raised regarding the enforceability of a memorandum of understanding. The dispute was related to the transfer of shares and the validity of the agreement. The matter reached the High Court of Orissa.

Issues

Whether the enforceability of a memorandum of understanding entirely depends on the interpretation by the court?

Judgment

In this case, the court introduced an objective test to check the enforceability of the memorandum of understanding. It was stated that the most appropriate way to check the enforceability of a memorandum of understanding is to check the intention of the parties while establishing the relationship. If a man with ordinary prudence believes that the intention of the other party is to create legally binding relations, then the other party has to compulsorily fulfil his or her obligations. The Court further stated that to make the memorandum of understanding legally enforceable, it is important to – 

  • Use legally binding clauses such as a dispute resolution clause, a confidentiality clause, or an indemnification clause;
  • Use of such language that creates legal enforceability, such as the use of words that establish emphasis or mandate.

International Memorandum of Understanding

An international memorandum of understanding refers to a legal document that is like a treaty that is signed between two or more than two nations. All the international memorandums of understanding are registered with the United Nations Treaty Collection. They are extremely confidential documents. However, like any other memorandum of understanding which is signed between two parties and the enforceability depends on the discretion of the parties involved, an international memorandum of understanding is also a document where legal binding nature is determined by the intent of the parties involved in the agreement. 

One of the landmark cases involving the International memorandum of understanding is Qatar v. Bahrain (1994). In this case, the International Court of Justice declared that a memorandum of understanding can only be declared legally enforceable if it meets certain criteria as established by the court.

Sample Memorandum of Understanding 

Disclaimer: The sample is only for reference and understanding purposes, and one can add or subtract clauses according to the parties’ needs.

MEMORANDUM OF UNDERSTANDING

This Memorandum of Understanding (hereinafter referred to as “MOU”) is being signed and entered into on the 25th of July, 2022 (hereinafter referred to as the “Effective Date”) in Maharashtra, India;

BY AND BETWEEN

Elpis Global University, which was established in 2005 by an Act of the State Legislature of Maharashtra. The university has earned an “A” grade from the NAAC and is certified by the University Grants Commission. It has its registered office at Wallington Library, Mahatma Gandhi Marg, Bandra West, Maharashtra, India. (Hereinafter referred to as “Party 1);

AND

Warm Christian University, a globally reputed law university, is constituted under and governed by the laws of Austria and having its registered address at 34/55, Flamingo Lane, Habsburg, Austria. (Hereinafter referred to as “Party 2”);

Party 1 and Party 2 are hereinafter collectively referred to as the “Parties” while individually “Party”.

WHEREAS

  1. Party 1 is a reputed law university in India dedicated to empowering its students for better employment, research as well as development in the fields of law. It has a 33,000 acres campus with world-class amenities and strives to bring holistic exposure to its students.
  2. Party 2 is a globally recognised institution located in Austria; its focus is on world-class research on contemporary legal needs and practices. The prime focus of the institution is in the field of cyber law. 
  3. The Parties after numerous rounds of negotiations have decided to enter into this MOU to promote student exchange programs, holistic development of the students, legal research collaborations as well as overall expansion of the academic horizons of their students.

THEREFORE, the parties hereby agree in consideration of their shared obligations which are set forth below:

  1. OBJECTIVES
  1. To emphasise and promote legal research and collaboration between different organisations and create a virtual world for legal research having no boundaries. 
  2. To design a dual Master’s degree to be delivered at Elpis Global University as well as Warm Christian University.
  3. To organise and promote student exchange programmes, holistic development of the students and legal research collaboration for students of both the Universities enrolled in executive programmes for a period of 5 years.
  4. ROLES AND RESPONSIBILITIES
  1. It is agreed between the Parties that any activity or programme implemented and undertaken with regards to the objectives in clause 1 will be separately negotiated and agreed between the respective universities or departments or faculties of the Parties as the case may be.
  2. The division of the fee structure for the dual degree mentioned in clause 1(b) shall be such that Party 1 will be entitled to 80% of the fees of the first four semesters and Party 2 will be entitled to 80% of the fees of the last four semesters.
  3. The course of the dual master’s degree as mentioned in clause 1(b) will be independently designed by Party 1 and Party 2 together. Both the parties will have absolute autonomy in their respective spheres.
  4. Student Exchange programmes for undergraduate students for a period of 8 months during their first year will be designed and autonomously decided on by Party 2; while the same for postgraduate students will be decided and designed by Party 2.
  5. The doctoral fellows in each of the Parties will collaborate subject to clause 2(a). In case any intellectual property arises as a result of the research activities carried out by students in collaboration with the universities, each party involved in the agreement shall receive fair and equitable ownership of such intellectual property. 
  6. Both Parties acknowledge that prior written consent from the other Party is mandatory before using its trademark, logo, or other copyrighted material in any advertisement or related promotions.
  7. Given the situation of the ongoing pandemic, all activities with reference to clause 2 will take place virtually using the online interface developed by Party 2.
  8.  TERM AND TERMINATION
  1. This MOU is valid for a period of five years starting from 25th July 2022 to 25th July 2026. The MOU shall come into effect from the date of signing of the agreement by the signatories appointed by each Party.  
  2. At least five months prior to the MOU’s expiration, each Party shall evaluate the MOU’s existing status and decide whether it still wishes for it to be in effect and, if so, what changes might be required. Only a mutually agreed-upon written extension from both Parties shall extend the MOU’s validity period.
  3. The MOU can be terminated by either of the Parties during its validity at their convenience by giving a written 3 months notice through the post. No termination can however take place prior to 6 months from the termination date.
  4. That the pending student exchange programmes and the then ongoing batch of the dual master’s programme should not suffer because of the termination (either because of completion of term or exercise of power under clause 3(b) by either party) of this MOU has been agreed to by the parties and hence, they have decided that these two programmes will be brought to conclusion by the parties through virtual mode.
  5. REPRESENTATION AND WARRANTIES
  6. Party 1 represents and warrants that it:

i) has the authority to execute, deliver and perform its obligations under this MOU, having obtained all required consents from the Trustees and the Dean of the institution; 

ii) is duly organised and formed under the laws of India

  1. Party 2 represents and warrants that it:

i) has the authority to execute, deliver and perform its obligations under this MOU, having obtained all required consents from the Trustees and the Dean of the institution;

ii) is duly organised and formed under the laws of Austria.

  1. DISPUTE RESOLUTION
  1. It has been agreed by the parties that any dispute, controversy or claim arising out of, relating to or in connection with this MOU, including any question regarding the interpretation of any terms and conditions in this MOU, validity or termination of the MOU, any difference of opinion with regards to standard practices, shall be resolved by mediation administered by the International Court of Arbitration and Mediation in accordance with the International mediation rules proposed by International Chamber for Commerce.
  2. The number of mediators shall be three. Each Party gets to appoint one mediator individually and another mediator mutually.
  3. The place of mediation shall be Habsburg, Austria.
  4. The language of the arbitration shall be only French.

Signed for and on behalf of Elpis Global University by – 

Name:  

Position:  

Date:

Signed for and on behalf of Warm Christian University by –

Name:

Position:

Date:

The top 3 Memorandum of Understandings signed in 2022

  1. In India and Namibia, for the reintroduction of cheetahs in the Indian territory

Recently, a bilateral memorandum of understanding was signed between India and Namibia. The agreement aims to reintroduce the cheetah as a part of the Indian fauna. After nearly seven decades, India will again have cheetahs in its dense forest areas. The agreement was signed by Bhupendra Yadav, the minister of environment, forests, and climate change, and the Deputy Prime Minister and Foreign Minister of Namibia, Netumbo Nandi Ndaitwah.

As per the agreement, the first set of eight cheetahs will be introduced in Kuno National Park located in Madhya Pradesh. This first set will be introduced on August 15. The agreement has been signed as a part of the cheetah translocation project, which is a commendable initiative by the Ministry of Environment, Forest, and Climate Change. The prime objective of the introduction of cheetahs is to first breed them in a cage before releasing them into the wild.

  1. Flipkart and the Bihar Skill Development Mission for filling skill gaps and creating job opportunities.

Flipkart and the Bihar Skill Development Mission have signed a memorandum of understanding for the development of a supply chain operations academy. The objective of setting up this academy is to cover the skill gaps as well as introduce employment opportunities. According to the memorandum of understanding signed between the parties, the academy would offer a 60-day training programme to individuals who want to make a career in supply chain operations. The 60-day training will be divided into two parts: the first will be a 15-day classroom programme which will be held on a digital platform of Flipkart known as the Flipkart Learning Management System. The other 45-day programme will be an on-the-job training program. At the successful completion of 60 days, the individuals will receive a stipend of 17,500 INR.

  1. Rajasthan Grameen Ajeevika Vikas Parishad and Telangana Stree Nidhi Credit Cooperative Federation for the development of India’s first all-women-run Cooperative Bank

Recently, a memorandum of understanding has been signed by the Telangana government to promote women’s empowerment in Rajasthan. Following the same, Rajasthan Mahila Nidhi will be established, taking its inspiration from Telangana’s Stree Nidhi. The agreement was signed between the Mission Director of Rajasthan Grameen Ajeevika Vikas Parishad, Manju Rajpal, and the managing director of Telangana Stree Nidhi, G Vidyasagar. The agreement was signed in the presence of the minister of rural development, Ramesh Chandra Meena. 

The prime objective of the memorandum of understanding is to empower the women’s self-help groups by decreasing the burden on banks for the loan application as well as creating a complementary body that can act as a formal bank when these self-help groups need money 

Conclusion

A Memorandum of Understanding is written with a broad goal in mind since communication between the parties to an agreement is essential. Due to how passionate the crew implementing the plans is, there is frequent miscommunication or misinterpretation of the ideas mentioned, and these understanding gaps can cause plans that were intended to fly high to seriously falter. When the parties are in close communication with one another and are constrained by some sort of agreement, it gives them greater room to explain their case, thoughts, plans, or daily updates.

A memorandum of understanding has a prominent role in the 21st century. The use of a memorandum of understanding is not limited to private sector enterprises. A memorandum of understanding is used by various national and international organisations and countries, as well as multinational companies operating in numerous nations. Today, it acts as a potential substitute for the agreements that create legal binding relationships between the parties involved. 

Despite numerous years of drafting the memorandum of understanding, even today the parties to the agreement face financial losses due to ambiguity and lack of legal enforceability. Hence, the need of the hour is to emphasise the use of words which create the legally binding nature of the memorandum of understanding. The judicial system needs to create a code of conduct that has to be followed while framing agreements like memorandum of understanding to decrease the potential burden on the courts and protect the people against any unfavourable circumstances. 

Frequently Asked Questions 

What is the difference between MOU and a contract?

Memorandums of Understanding, or MOUs, are agreements between two parties to cooperate in order to accomplish a common objective. Contrarily, a legally enforceable agreement formed between two or more parties is referred to as a contract.

Is there a certain no. of who can use an MOU?

An MOU may have as many parties as necessary as long as there is more than one.

How long does an MOU last?

An MOU generally lasts for the course of a specified time period or the occurrence of a specific event. The parties will determine the time frame. 30 days, 60 days, or a year, for instance.

Are the pirates in an MOU referred to as agents or partners?

Each party is an independent party and there is no creation of partnership or agency relationship.

Is stamp duty mandatory for the enforceability of the memorandum of understanding?

A memorandum of understanding typically does not require payment of stamp duty. However, the memorandum of understanding should be stamped if it contains a commitment to buy real estate valued at more than INR 100. Stamp duty is also mandatory when an individual needs to present the agreement in court. A document with paid stamp duty can be accepted as evidence in court. If a legal document is not duly stamped, the court will not accept it as evidence.

Are the terms and conditions of the memorandum of understanding applicable to the parties after the expiration of the agreement?

The terms and conditions of a memorandum of understanding cease to be in force when it expires. The agreement may be completely terminated or its terms may be renegotiated at any time by the parties.

If the memorandum of understanding is renewed, the new agreement will include updated terms and conditions reflecting the changes as agreed by the parties. 

Can a party terminate a memorandum of understanding? 

Termination of a memorandum of understanding entirely depends on the clauses drafted in the document. A memorandum of understanding can be terminated by simply agreeing to the termination and notifying the other party in writing.

Each party must notify the other in writing of the termination once it has been decided to terminate the agreement. Email, an official letter, or even a phone conversation can be used for this. To avoid any misunderstanding regarding the termination of the memorandum of understanding, it is crucial to make sure the communication is precise and unambiguous. The memorandum of understanding is deemed to have ended after the other party has been informed.

It is significant to remember that, depending on the provisions of the document, there can be a set of requirements or circumstances that must be satisfied before the memorandum of understanding can be terminated. For instance, some memorandums of understanding may call for a termination notice before termination. Before making any decisions to terminate your memorandum of understanding, be careful to review its conditions.

Is a memorandum of understanding enforceable in a court?

The enforceability of a memorandum of understanding depends on a wide range of factors, including the agreement’s contents, the legal system under which it is being enforced, the intent of the parties involved, and the circumstances in which the agreement was made.

However, a memorandum of understanding is more likely to be supported in court if it is unambiguous, concise, and contains all significant details regarding the rights and liabilities of the parties. The memorandum of understanding must also be signed by both parties for it to be enforceable. The agreement may not be enforced by a court if one side declines to put a signature. 

Does a memorandum of understanding require notarisation?

No, a memorandum of understanding does not require notarization. To demonstrate their good faith, both parties may want to have the agreement attested by a third party. Both parties may choose to consider having the memorandum of understanding notarized as additional proof if they want to enforce their obligations in court.

References 


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