What is a Memorandum of Understanding?
A Memorandum of understanding (MoU), also known as a Letter of Intent in India, is where two parties come together to reach a decision. It is a legal document that describes the basic and broad outlines of an agreement. An MoU agreement is made when two parties or more have agreed to enter a contract but are yet to negotiate the rights and obligations. It is used with the intention of carrying out a deal before it is officially signed. Though MoU is a legal document it does not constitute a legally enforceable obligation.
Features of MOU
The following features should be found in a Memorandum of Understanding:
- Name and other details of the Parties between whom the MoU is being signed.
- It should specify the goals and purpose of the MoU.
- It should mention the plan for the meetings by parties.
- It should acknowledge the person responsible for making financial decisions.
- It should mention the program undertaken for financial record keeping.
- It should specify the capital contributions to be made by the parties.
- The Memorandum should specify the date and have the signatures of the respective parties.
- The Memorandum should mention the commencement date, ending date, and duration
- It should provide the appointment of a person responsible for operations and day-to-day management.
Legal Validity & Enforceability.
The legal validity of an MoU can be determined by its rights, duties, and obligations that are created among the said parties.
For example: If a Memorandum of Understanding is made for the exchange of money or consideration, etc then the document would be binding on the parties else it is a non-binding contract.
In a general sense, the enforceability of a Memorandum of Understanding can be understood by dividing them into two categories:
- When the MoU fulfills the conditions of a Contract as per The Indian Contract Act, 1872 mentioned in Section 10 i.e.
- There must be an offer made by one party and accepted by another
- The consent of the parties must be free and not affected by fraud, coercion, or undue influence
- The parties must be competent to enter into a contract. This means that they must be more than 18 years old, must be of sane mind, and not be considered as insolvent/bankrupt
- There must be a lawful consideration
- There must be a lawful object
- There must be an intention to create legal relations
If MoU satisfies the above conditions, then the performance of the MoU can be enforced vide The Specific Relief Act, 1963.
- When the MoU does not fulfill the conditions of a Contract as per The Indian Contract Act, of 1872.
- If the court finds that the MoU lacks certain obligations to form a valid contract, the same cannot be enforced.
- However, a person has the right to approach the court
Things to include in a format of an MOU:
1.Objective or Purpose of entering MOU,
2. Responsibilities of each party,
3. Meetings and manner of Reporting,
4. Technical and Financial Support, if any,
5. Financial Consideration, if any, involved in the transaction,
6. Person responsible for the Management,
7. Duration of MOU,
8. Confidentiality Clause,
9. Conditions driving towards Termination of MOU,
10. Possibility of Extension,
11. Ways of Communication,
12. Severability Clause,
13. Arbitration Clause,
14. Indemnity Clause, etc.
Depending upon the nature of the transaction covered under the MoU, the clauses can be added or removed and agreed upon with mutual consent.
A memorandum of understanding possesses a unique authority. It is an agreement between two or more parties outlining the terms and details of an understanding, including each party’s requirements and responsibilities. It is often the first stage in the formation of a formal contract. When drafting an MoU, it is essential to consider the party’s intentions, the document’s clauses, and the language.
The enforceability and validity of an MoU depend on the purpose and components of the agreement. As previously stated, if the MoU satisfies the basic requirements of a valid contract, which includes a valid offer, acceptance, intention, and consideration then it will be legally binding.