Legal Framework of MoU (Memorandum of Understanding)

A Memorandum of Understanding is a document that signifies the basics and objectives of two or more parties written out clearly. It creates an environment in which the parties share an objective and determine the preliminary roles, duties, and expectations even though this is not a contract, and thus has no legal standing.

Most sectors, among them non-profit organizations, governments, businesses, and education, have these MOUs in place to develop future agreements. An MOU features the goals of each party and a pledge from each party, and it serves to understand the purposes of collaboration, reducing the risks of a lack of understanding and building confidence. Indeed, even though not as sensitive to the law as contracts, MOUs often represent the first step of cooperation between parties; further, more detailed legal agreements are usually made as parties learn how to work with one another.

What is a MoU?

A Memorandum of Understanding is a declaration of common intention and understanding between two or more parties designed to settle their common goals and how to achieve them. MOU does not have the power of a contract in a court of law, however, it is very important in order to avoid needless conflicts between interested parties and also ensure that everyone agrees on key issues before proceeding to serious discussions or signing an agreement.

It is commonly employed in governmental, academic, non-profit, and business sectors. Such documents assure everything is written down regarding who does what, who aims at what and who expects what thus reducing chances of confusion or misinterpretation. More flexible than formal agreements but more rigid to the law than the latter, an MOU can be changed when the need arises as there is no need to go through the process of enforcing a contract.

Typically, a Memorandum of Understanding would elaborate on the purpose of cooperation, activities to be implemented, roles of participants and the basic framework under which this cooperation can take place. It may also include details on how long parties intend to work together, ways the agreement might be modified, or how it might be ended. Even though an MOU would be more of a gentleman’s agreement in the majority of the circumstances, if not otherwise specified, most contracts are subject to minimum penalties or legal consequences at the time of violation. In this respect, the primary emphasis is on every representative having good faith and showing intent to cooperate.

Although MOUs fail to fully attain the legal effect of contracts, they are very instrumental as the first steps of negotiation, especially in situations involving strategic partnerships or programs with several actors. In the case of promoting the advancement of cooperation and signing of a formal agreement, the very clear definition of objectives and responsibilities in the MOU helps a lot. Such documents help interested parties be focused on a common cause and prepare the stage for even more complex solutions; therefore, such bilateral agreements are necessary.

Essentials of a Valid Memorandum of Understanding

For an MOU to work effectively as a working document or preliminary agreement, it must have well-defined elements. The principal characteristics of a feasible MOU include:

1. The MOU must reflect the purpose and objective of such an agreement, which, in turn, implies the ends to be achieved by both parties when working as a team or in partnership. Such helps set a baseline and direction for all involved.
2. All parties, including their names and nature, should be provided if they are signatories to the MoU. This will ensure that there is no ambiguity and, more specifically, the identity of each party involved in the agreement.
3. The scope of work under the MOU shall specify the work activities, tasks, or responsibilities to be undertaken by each party. Such specification establishes the scope of work to be performed by each party and constrains the extent of the arrangement.
4. The MoU can be differentiated from the agreement, but it should still clearly outline the above-mentioned cooperation, including all the provisions and terms and conditions it may impose and any limitations, rights, or responsibilities. Take, for example, terms like confidentiality agreements or simple etiquette rules standardising the behaviour of the contracting parties.
5. If it is a MOU that governs the collaboration, then both tenure of the MoU, and the mode of its termination must also be in the limelight. In this regard, it gives a scope of the applicability of an agreement without even taking into consideration the termination of the partnership.
6. Since the MOU has to be signed and dated by both/all parties, hence it is only from authorised signatories. Thus, according to the contents of the signed document, each one of the parties binds the other.

Enforceability of Memorandum of Understanding (MoU)

The general intent and content of the Memorandum of Understanding shall primarily determine its enforceability in the Indian legal landscape. An MoU is generally thought of as a non-binding document showing shared aspirations and the outline of an agreement. Notwithstanding it may be dealt with as an Indian law contract and hence, can be enforced in the court of law under the presumption that MoU has terms and obligations and intention of enforcement of the relationship.

1. Intention to Create Legal Relations: In this nature, for MoU’s to be imposed, the parties must demonstrate an intention which is clear, to be bound under law. If words of the MoU portray it as only intended to be in effect temporarily, then it will rarely be considered binding.
2. Definite Terms: A memorandum of understanding that clearly defines terms like a specifically defined assignment, timelines, and also consequences for their failure to honour the terms can be enforced as a contract. Normally, vague or provisional expressions are an indication of the lack of intent to be bound legally.
3. Consideration: Section 10 of the Indian Contract Act of 1872 states that any contract must contain “consideration” or something that is bargained for. In any event, without consideration, an MoU most likely will not be enforced.
4. Legal Formalities: Some agreements have registration or other legal aspects. In the case of MoU, there are provisions that require registration or notarisation for its enforcement and non-compliance risks putting its enforceability at risk.
5. Explicit Non-Binding Clause: The fact that the memorandum of understanding states that it is non-enforceable gives assurance to both parties that there are no legally binding obligations and therefore less chance that it might be treated like a contract.

Important Case Studies

The following case studies will help us to have a better understanding of memorandum of understanding and its enforceability and admission in the court of law.

• Jyoti Brothers v. Shree Durga Mining (1956)

Facts: Given the dynamically ever-changing mining sector, both parties would more than likely draft and conclude more complex contracts while being bountifully informed of the possible risks involved by entering the MoU. The MoU was a declaration that outlined the aspirations of the parties and included some conditions governing the joint endeavours; however, it had no terms that were clear and capable of being enforced. It has just followed a series of events wherein parties raised various arguments on the question of whether the MoU can be enforced. One party insisted that it was a contract that could be enforced, whereas the other party upheld that it was only an expression of intent.

Issue: The main issue of the court was whether the MoU in question could be said to be a binding and enforceable agreement between its parties, mainly for the reason that it was more on the objectives than on definite and specific duties, which was more adobe than essence.

Judgment: The court held that the MoU was a non-enforceable one in the absence of some constitutional elements without which the Indian Laws would state it to be an unenforceable agreement, essentially lacking a definition of obligations and a will of parties that would agree to enter into a contract enforceable by law. The court held that the MoU was a mere agreement to agree and thus lacked all the elements of a contract. This rule restated the principle that although an MoU can be operative ipso facto, it must still have at least the basic constituents of a contract: clear terms and intent to create legal relations with a view to it being enforceable.

• Jai Beverages Private Limited v. State of Jammu and Kashmir and others (1956)

Facts: Private Company Jai Beverages Private Limited has entered into an agreement with the State of Jammu and Kashmir for setting up its bottling unit. In a bid to promote industrialisation in the region, the state provided several tax concessions and other benefits to JBPL. However, some of such promised disadvantages were withdrawn by the state, prompting JBPL to file a legal suit because, according to it, this withdrawal was unjustified, further constituting a violation of the agreement between the parties.

Issue: The core issue was, whether the government has power to withdraw the promised benefits where the investor has already ploughed in funds since he relies on such gains, and whether the principle of desistance can restrain the government from reneging on its commitment.

Judgment: The High Court of Jammu and Kashmir ruled in favor of Jai beverages, holding that the government was bound by the principle of promissory estoppel. The court observed that since JBPL has reasonably relied on the representations made by the government that they will be given certain commitments and the huge amounts of money spent, it is not open for the government to go back on such undertakings. The state, as such, is restrained from retaking the promises made to the investors upon which they have reasonably invested, but it is this principle of promissory estoppel that is held by the court. This judgment also vindicated the doctrine of promissory estoppel in Indian jurisprudence, as represented by state assurances, which could be held binding on the state when such representations have led to action by a party. The Court clarified that such promises should not be withdrawn illogically in the light of the Court’s perception of what investment promotion agreements are intended to do.

• Bikram Kishore Parida v. Benudhar Jena (1975)

Facts: A sale agreement regarding the property was the point of controversy between Bikram Kishore Parida and Benudhar Jena. Being the prospective purchaser, Parida alleged that he had entered into an agreement with Jena, who was the proprietor of the property, to sell him such property for a fixed amount of money. He further alleged that he had even made part payment in advance, but Jena subsequently refused to accept the sale to be consummated. This led Parida to file a suit for specific performance in order to enforce the contract.

Issue: The issues before the court would be whether any relief can be granted with regard to the sales agreement under the Specific Relief Act of 1963 and whether Parida can be granted specific performance of the contract with Jena being reluctant to sell the property.

Judgement: The court ruled in favour of Parida, as it granted him specific performance of the sale agreement. The court came to the conclusion that the agreement was both valid and binding because, firstly, it was supported by consideration and secondly, because there was also an agreement between the parties to the contract. The court found that for this reason, since an advance amount had been paid by Parida and as he was willing to perform his part of the agreement, he was entitled to the relief of specific performance. This was a scenario that showed that the sale agreement for immovable property is valid and can be enforced in the courts, especially when prepared parties are willing to undertake their respective obligations as required by the law. The right to specific performance was emphasized in the case where the buyer had fully undertaken his or her obligations under the agreement.

Conclusion

Basically, MOUs or Memoranda of Understanding are useful tools for parties from different sectors- be it business, government, or even non-governmental organisations- to begin working toward a mutual agreement. MoUs are not enforceable agreements whose significance is to define the shared purpose, the tasks, and the organisation of the work to be done as much as possible so that there is no overlapping in duties and increasing chances of miscommunication.

On the other hand, in some situations, such MoUs can become a legally binding one due to the presence of the elements of the contract such as intention, terms and consideration. For example the Indian Courts have held that “the Memorandum of Understanding is not a contract in the strict sense of the term unless it evidences an intention to enter into legal relations to which the requirements of the Indian Contract Act, 1872 are met”.

On the whole, the MoU is a very useful document to express the first ideas and intentions of parties, as a premise for other even more profound agreements.