This article is written by Ramya Kiranmayi Bhamidipati who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
A Memorandum of Understanding (MoU) is a formal arrangement between two or more parties that have agreed to enter into a contract, usually executed by the government organizations, non-government organisations, and occasionally by the corporates. An MoU is described as a ‘meeting of the minds’ between the parties and aids to understand their purpose, goals, needs, obligations, and roles. In India, MoU is acknowledged as the letter of intent, where two or more parties summarise the Consensus or Common Parameters to work and must be signed by contracting parties.
Purpose of MoU
The Memorandum of Understanding is entered into in a variety of situations where:
- Parties have no intention to create a legal relationship
- Parties want to have a mutually beneficial partnership; or
- Want to summarize the mutual conditions of transactions
Examples: MoU entered by two universities, Professional institutions from different countries, between two governments or government bodies of different states or different counties.
Intention of MoU
MoU records agreements that are not necessarily legally binding. Parties use them to mark a commercial partnership rather than to create legal obligations. In other words, MoUs may be used to reduce the goals and roles of parties in a commercial partnership, however, this document assists the parties for negotiation. It is evident that breaches do not have a legal consequence and it is up to the parties to resolve disputes.
Steps involved in drafting MoU
Step – 1: Planning Phase: each party expresses its requirements, objectives, goals, and negotiable points.
Step – 2: Drafting Phase: parties then draft the initial MoU
Step – 3: Negotiating phase: the MoU typically outlines guidelines that govern the mediation process.
Step – 4: Timeline negotiation: on completion of negotiations, parties establish a timeline for the MoU to take effect, when it shall expire and any rules regarding termination.
Step – 5: Restrictions: finally, each party adds any restrictions, disclaimers, privacy statements, etc., and signs the final MoU.
Contents of an MoU
It is understood that MoU is a written expression of the intent of the parties, typically jots down the intended action. Therefore, the scope of MoU is not limited and basically can be used in any scenario where the parties do not aspire to a formal contract. However, the following are imperative in MoU:
- Proposal or Deal: One party to the MoU shall put forward his proposal or offer to the other parties, also state his promises or obligations, purpose, intention, if any, very precisely. Where any timelines are involved, the same should be drafted properly.
- Acceptance of the Proposal or deal: The other party the MoU should acknowledge the proposal made, expressly state its acceptance, any Terms & conditions, promises, or obligations, if any.
- The intention of Legal binding: The parties may outline in the MoU that certain clauses are binding and enforceable in nature. Where an agreement explicitly stated as MoU, it does not override the binding effect; it depends upon the intention of the parties and the drafting of clauses. The same was laid down by Supreme Court in Kollipara Sriramulu v. T. Aswathanarayana and Ors, that “a mere reference to a future formal contract will not prevent a binding bargain between the parties. The fact that the parties refer to the preparedness of an agreement by which the terms agreed upon are to be put in a more formal shape does not prevent the existence of a binding contract.”
- Consideration: The MoU shall expressly state that the scope and manner of discharge of consideration and mode of payment. Benefits that can be availed by each party to the agreement.
Apart from the foregoing clauses, the following are vital for forming an MoU:
- Parties: MoU should state the details of the parties along with a brief introduction of the parties’ business, or activities.
- Duration: Memorandum should state the period validity i.e. from the date of commencement to the date of ending, terms of extension of the memorandum; events under which terms of the memorandum can be altered, amended, and terminate the Memorandum by the parties.
- Signatures: The Memorandum should be dated and signed by the parties, where any legal person like Corporate, Cooperative society is involved, a representative like CEO, head of the department or Chairperson shall sign on behalf of such organization.
- Confidentiality: Critical information is made accessible to the parties of MoU and the disclosing parties are at the obligation to preserve the data or information at safe custody, ensuring necessary steps are taken to avoid unauthorized access.
- Dispute Resolution: As such MoU is not a standard contract, thus not enforceable unless the parties expressly state it. A formal dispute resolution clause is generally not found in MoU, therefore parties either resort to mutual negotiations or refer to the higher authorities of the organization.
Advantages of MoU
- Collective Intention: Parties to the contract sets out their goals and objectives in the MoU, which establishes a mutual intention for future engagement.
- Eases the Risk of Uncertainty: Business negotiations can be hard and mostly confusing at the inception of relations between the parties. The disagreements between the parties over the terms & conditions of the contract can lead to a dire consequence. Thus, MOUs cater safety measures to jeopardize the uncertainty in expectations and objectives. This is because the proposed terms are already set out and agreed upon by the parties. Specifically, this is beneficial in commercial partnerships and relations where the engagement is over a prolonged period.
- Prior Understandings will be documented: During the course of negotiations, parties agree on certain terms & conditions, which shall be reduced in Memorandum, this provides a precise understanding between the parties on their common objectives. Further, MoU provides a safe ground to communicate confidential information.
- Outlines future businesses: Even for knowledgeable business persons, entering into a formal contract can be overwhelming when the transaction is critical or spreads over a long period. Therefore, an MOU can aid parties, as the proposed terms are elaborately jotted down in a document providing a framework for future dealings. The MOU can be used as a foundation for the future contract and referred back to as a reminder of the parties’ objectives and intentions if any confusion crept in. In high-risk situations, it is advisable to have a formal document in advance to ensure parties are on the same page.
Disadvantages of MoU
The concept that MOUs are not legally binding enables the parties to exit the agreement or not meet the requirements outlined in the agreement without consequences.
MoU is a document that outlines the agreement or promise between the parties. MoU does not behave like a contract, however, where an MoU satisfies the conditions of Section 10 of Indian Contracts Act, 1872, i.e. where there is a valid offer and acceptance with lawful consideration then such MoU shall be legal and enforceable under Specific Relief Act, 1966.
Therefore, the legal enforceability of MoU solely relies on the manner of drafting, contents mentioned in MoU, duties, and obligations listed out in the MoU. Also, the inclusion of an indemnification clause, dispute resolution clause, and applicable law clause can make the MoU binding, as these clauses obligate the parties to adhere to the terms written in the MoU.
Where the clauses of an MoU expressly states that the binding nature, then such MoU results in legal enforceability.
In Jyoti Brothers vs. Shree Durga Mining Co. [AIR 1956 Cal 280] Calcutta High Court held that “a contract to enter in a contract is bad and not valid from the point of view of the law. However, the court will rely upon the degree of importance of such understanding to the parties and to the fact that whether any of them has acted in reliance on such understanding.”
If the parties intend to avoid legal enforceability then such MoU shall include a statement like
“This memorandum is in no way a legally enforceable contract between the aforementioned parties.”
Note: Where an MoU cannot be established as a valid contract, then it can be enforceable in the court through the principles of Promissory estoppels and equity was laid down briefly by the Hon’ble Supreme Court of India in this Landmark Judgement in “Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh” i.e. whereby a promise has been made by a person knowing that it would be acted upon by the person to whom it is made, and it is inequitable to allow the party making the promise to go back upon it.
In Millenia Realtors Private Limited v. SJR Infrastructure Private Limited, it was stated that MoUs are not to be construed as contingent contracts, and are capable of enforcement.
Stamp Duty on MoU
To enforce the MoU, it is suggested to register it, in order to safeguard the interest of the parties involved. Where MoU deals with monetary exchange, the immovable property shall be registered to protect the interest of the parties.
International MoU is formed in the manner of a treaty and is registered under the United Nations treaty collection, these MoUs should be registered to avoid secret diplomacy and also are sometimes kept confidential.
Just like national MoU, the intention of the parties and the language used for drafting the MoU plays a vital role in the enforceability of international MoU. The legal position of the parties is pivotal in determining the enforceability of the MoU, these are protected and subject to the jurisdiction of the International Court of Justice.
The International Court of Justice has laid down structured standards for the legality of MoU.
Internationally MoUs are signed between two different countries for exchanging resources, technical products, researching plans, or for the student exchange program.
While drafting the Memorandum of Understanding, the drafter should ensure that he is aware of the intention and purpose of the parties. The Memorandum of Understanding must be drafted vigilantly and take appropriate care while selecting the language, titles, and clauses of the Memorandum of Understanding. The drafter should precisely and concisely establish the intention and objects of the parties; and weak and vague drafting can harm the interest of the parties.
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