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IS MOU LEGALLY BINDING IN INDIA?

MOU

MEANING OF MOU

A Memorandum of Understanding (MOU) is commonly a fundamental comprehension between at least two parties, before the execution of a proper understanding viz. a contract. It is a document featuring the expectation of the contracting parties and may likewise be known as a Letter of Intent (LoI). MOU is commonly executed to outline the rights and obligations of the parties for making accord between the parties to the agreement who are looking for entering into future agreements and is typically not intended to have created any obligations upon the parties. The purpose of arriving at a MOU is to comprehend the expectations of each party before they actually execute a contract, moreover it doesn’t create rights of either of the parties rather it just expresses their willingness to enter into a contract in the future. In other words, MOU can be viewed as the beginning stage for negotiations as it defines the scope and purpose behind the discussions, for example, merger talks in business bargains, and additionally, they can be kept secret by the parties, if they intend to do so.

CONTENTS OF MOU

It clearly outlines explicit purposes of an understanding. It might specify the name and specifics of the parties; the reason and objectives for which the MOU is being arrived at; the arrangement for periodical meetings between the parties; the measure of capital commitment to be made by each party; the insights regarding role, responsibilities, and remuneration; the duration of such an agreement; and the like.

LAW GOVERNING VALIDITY OF MOU IN INDIA

Now the question arises whether MOU is a valid legal document in the eyes of the court. The answer can be looked upon for by analyzing Section 10 of the Indian Contract Act, 1872.

The Indian Contract Act, 1872, governs the law on MOU and it is provided therein that if conditions of a valid contract as enshrined under the Act, are fulfilled, then in such a case its performance, like any other contract would be governed by the Specific Relief Act, 1963 where the parties to a contract can invoke the provisions dealing with specific performance of the contract in cases where the compensation cannot be quantified in terms of money i.e. it is unascertainable in monetary terms.

According to Section 10 of the Act, every agreement is a contract, if it fulfills all the following essential requirements of a legally binding contract:  

  • There must be an offer/proposal made by one party and accepted by another;

  • The consent of the parties must be free and must not have been obtained through fraud, coercion, misrepresentation, or undue influence;

  • The parties must be competent to enter into a contract, i.e. they must be more than eighteen years of age, must not be of unsound mind, and should not be declared as insolvent;

  • There must be a lawful consideration;

  • There must be a lawful object;

  • Lastly, there must be an intention to create legal relations.

On a perusal of the above provision, it can be clearly stated that the intention of the parties to enter into a legally binding contract must be made out from the terms of the document. The intent of the parties can be interpreted from the substance of the MOU. If the MOU has been drawn for consideration, like for money exchange, then the document would become legally binding on the parties, else it is a non-binding agreement and would not qualify to fall within the definition of “contract” as given under Section 2(h) of the Indian Contract Act, 1872.

Therefore, if the MOU is drafted in such a manner that it fulfills all the ingredients of Section 10, it can be validly treated as a contract and will be legally enforceable in a court of law. Moreover, in such a case the rights and obligations created by the MOU must be performed, failure of which would be treated as its breach and would eventually be considered similar to the breach of contract. The Supreme Court of India laid down in the case of State of Orissa & Ors. v. The Titaghur Paper Mills Company Ltd. & Anr., A.I.R. 1985 S.C. 1293, that the real nature of any document or transaction is not determined by its nomenclature rather it is to be determined by giving a real, thorough and holistic reading to the terms and description of the document (in this case the MOU). The real nature of a document cannot be made out by reading only a specific portion or clause(s) of the document. Also in M/s Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors.2006 (4) S.C.J 401, the Supreme court stated that the enforceability of MOU can be ascertained by understanding its conditions, and if a party fulfills all the conditions which it is required to fulfill, then it is entitled to get the benefits promised/ arising out of it, and eventually the MOU will be enforceable.

On the contrary, if the conditions mentioned under Section 10 are not fulfilled, the MOU is not recognized as a contract. But, it can still be enforced in the court of law based on the principles of promissory estoppels and equity. The Supreme Court of India in its landmark decision Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar PradeshA.I.R. 1979 S.C. 621, observed that the “doctrine of promissory estoppel is a principle evolved by equity to avoid injustice and so 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 in fact it is so acted upon, and it is inequitable to allow the party making the promise to go back upon it.”

CONCLUSION

Basically, MOU is considered to be a non-binding document in the legal world. It doesn’t establish a legitimately enforceable obligation. It is ordinarily used for depicting the intention of the parties or businesses to work in consonance. In other words, it is only an “agreement to agree” and features business relationship, which, are probably going to bring about some contract or any other formal agreement between the parties. To be able to arrive at a MOU, the pre-condition is a consensus between the parties wherein they mutually understand all the terms of the MOU and the rights and obligations arising out of it.

However, if the intention of the parties to comply with the conditions of the MOU is clearly made out, then such MOU shall be legitimately enforceable. In a circumstance wherein all the requirements of Section 10 of the Indian Contract Act, 1872 have been met, then it must be treated as a ‘contract’ defined under Section 2(h) of the Act. If the parties reach an agreement to insert any such proviso/clause (legally-binding clause), then a legal relationship would establish between them and the breach of such provisions would amount to breach of contract and the legal consequences would follow.

Author(s) Name: Mahima Mahajan (Assistant Professor, The NorthCap University, Gurugram)

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