A Memorandum of Understanding (MoU) is an agreement between two or more parties who enter into a contract. An MoU is an agreement that is entered into by the parties before they enter into any future business agreement or arrangement. It is more of a mutual understanding between the parties in which they agree on some mutual points and on the basis of these points create an understanding and agree to not divulge or break any of the terms mentioned in the MoU. An MoU is a commonly used instrument in business agreements.
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Is a Memorandum of Understanding (MoU) enforceable?
An MoU is a mere letter of intent between the parties and generally does not have any legal enforceability and therefore is considered a non-binding agreement unless and until it has been signed and ratified by the parties in question and certain other pre-requisites are met. An MoU is a type of agreement that has to satisfy the essential conditions mentioned under Section 10 of an Indian Contract 1872 to be legally binding on the parties.
The Conditions to fulfil under Indian Contract Act are:-
- There should be an offer and an acceptance in an MoU.
- The parties should have entered into the said agreement with free consent.
- The parties to the agreement should be of competent age and should not be disqualified under the law to enter into a valid contract.
- There must an intent on the part of the parties to enter into a legally binding contract and the MoU should include lawful consideration and object in this regard to be legally binding.
Other Prerequisite conditions that need to be fulfilled.
The words used in the drafting of a Memorandum of Understanding (MoU) agreement can also play a crucial role in determining whether such an agreement is legally binding on the parties or not.
|Words used in an enforceable contract
|Words used in an non-enforceable contract
The use of such words tries to create a legal relationship by making the other person liable to do a certain act. The words shall, would, should, instead of may, can, and might are of a superior nature and bind the acts which follow after such words.
The parties can also agree to insert a legally binding clause in the Memorandum of Understanding (MoU) itself clarifying their intent to create a legal relationship between themselves and agreeing to be legally bound by the terms and conditions of the MoU. Along with this clause, some agreements even incorporate a dispute resolution clause in the MoU to provide for a method in which a dispute between the parties shall be resolved in good faith. Such clauses bind the parties to the MoU to perform their obligations as specified in the MoU the non-performance of which will lead to a breach and make the defaulting party liable for the said breach.
Case Laws regarding Memorandum of Understanding (MoU)
In Georgian Windpower Corporation et al v. Stelco Inc.
In the above-mentioned case, the parties had entered into a Memorandum of Understanding the period of which was two years but the agreement was terminated by Stelco Inc. before the expiration of the two-year period. The court held that the defendant was liable for a breach of some of the terms of the agreement and awarded damage to the plaintiff due to the wrongful termination of the same.
The Courts have time and again held up the opinion that the enforceability of a Memorandum of Understanding (MoU) depends upon the intention of the parties to enter into a contract. The same was held by the court in Jai Beverages Pvt. Ltd. V. State of Jammu Kasmir and Ors. And the court declared the MoU to be a legally binding document in the present case.
The court in Jyoti Brothers v. Shree Durga Mining Co. did not declare an MoU to be a legally binding document whereas conflicting opinions were reiterated in cases such as Bikram Kishore Parida v. Penudhar Jena and Structural Waterproofing & Ors. v. Mr Amit Gupta.
After the analysis and case laws mentioned above, it is clear that the question of whether a Memorandum of Understanding (MoU) is legally enforceable or not depends ultimately on the discretion of the courts and the individual circumstances. An agreement will be binding if it satisfies the requirements of a valid contract, which include the existence of a valid offer, acceptance, the intention of the parties to be contractually obligated, and consideration, or if a party acts in reliance on an agreement.
The intention of the parties while entering into a contract is an equally important thing to look at while determining whether a Memorandum of Understanding (MoU) is legally binding on the parties or not. If an agreement fulfils the conditions under the Indian Contract Act 1872 then such an agreement shall also be considered a legally binding MoU.
This article is written by Sparsh Jain, a 3rd-year law student at Symbiosis Law School, Noida.