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MEMORANDUM OF UNDERSTANDING: AN OVERVIEW

Updated: Feb 20, 2022

Written by: Sreerag C Manoj



Contents:




“ROW OVER DEEP SEA FISHING: KERALA GOVT CANCELS MOU WITH US FIRM"


"The Kerala government on Monday decided to cancel the controversial Memorandum of Understanding signed between US-based EMCC International and the Kerala Shipping and Inland Navigation Corporation (KSINC), against which the opposition has raised serious allegations.”[i]

We all might have read these lines as an important piece of information on almost all newspapers during February 2021 and repeatedly might have heard the word ‘MOU’. Have you ever thought of what is MOU? Is MOU an Agreement in its true sense? Let us dive in further to have an overview of MOU.


What is a Memorandum of Understanding [ii] (MOU)?


Memorandum of understanding is an agreement between two or more parties outlined in a formal document. It is not legal binding but signals the willingness of the parties to move forward with a contract in future. It is more of a formal alternative to a gentlemen’s agreement.


The MOU can be seen as the starting point for negotiations as it defines the scope and purpose of the talks. Such memoranda are most often seen in international treaty negotiations but may also be used in high-stakes business dealings such as merger talks.


Ingredients:

  • A memorandum of understanding is a document that describes the broad outlines of an agreement that two or more parties have reached.

  • MOUs communicate the mutually accepted expectations of all of the parties involved of the negotiation.

  • Although not being a legal binding, the MOU signals that a binding contract is imminent.

  • MOUs can often be found in international relations.


Contents of a Memorandum of Understanding (MOU):


An MOU clearly outlines specific points of understanding, such as naming the parties, describing the project on which they are agreeing, defining its scope, and tells about the roles and responsibilities of each party.


Even though it’s not a legally enforceable document, the MOU plays an important role because of the time and effort involved in negotiating and drafting of an effective document. Parties need to meet at a mutual understanding to produce an MOU. In this process, each side learns what important terms each party holds before moving forward.


The process begins with each party drafting their own best-case MOU. The parties consider their ideal or preferred outcome to be, what they believe they have, to offer to the other parties, and what points may be non-negotiable on each of their sides. This is the initial step taken by each of the parties for negotiations.


It is important to note that although MOUs are not legally binding they may include a clause that can be legally binding, and violations of the clauses may result in the guilty party being liable. The following key elements may render an MOU to be legally binding.


· An Offer[iii]

· Acceptance of the Offer[iv]

· Legally binding intention

· Consideration[v]


Advantages of MOU:


  • An MOU allows the establishment of a mutual intention. It enables each party’s goals and objectives to be clear.

  • The finalization of an MOU allows for having a paper trail or records of the terms that have been in the negotiations leading towards the finalization.

  • An MOU reduces the level of uncertainty between the involved parties because the document usually highlights the expectations and objectives and prevents possible future disagreement.

  • An MOU provides ease of exit; as any party that finds the objectives and goals not being met with can easily end the agreement.

  • MOUs already outline objectives and terms of the documents that can serve as the foundation for a possible contract.


Disadvantages of MOU:


  • The concept of the MOUs not being legally binding allows either party to exit the agreement or not meet the requirements outlined in the agreement without consequences.


Can MOU be cancelled?


MOU can be cancelled at any time if not registered and also when the either party files a private Police complaint.


How can MOUs be terminated?


The MOUs may be modified or amended by a way of written agreement between the parties. Each party has the right to terminate the MOU by giving a six months' notice in writing to the other parties at any time.


Can MOU be challenged in a Court of Law?


If there are financial considerations and if either one of the parties make a breach in the contract, such MOUs can be challenged under the Specific Relief Act, 1963[vi] in a civil court. After the breach of the contract, if any party abstains from performing the duties agreed upon, it can be challenged in court too.


Registration of MOUs:


MOUs can be registered under the Indian Contract Act, 1872[vii] when the legally enforceable elements are met with, such as:

  • Both the parties’ intention should be to create a legal relationship.

  • There must be an offer from one party and acceptance from the other.

  • There must be some consideration (usually involving money).

  • Both the party should be major and of sane mind.

  • There should be free consent provided by each party.

  • The objective of the contract should be legal.

  • The contract should not be expressly declared void.

  • Duration of time period should be mentioned.


Some Case laws where MOUs have been declared as legally enforceable documents:


1. Bikram Kishore Parida vs. Peculiar Jena[viii]

2. Structural waterproofing & Ors.vs. Mr. Amit Gupta[ix]

3. M/s. Nanak Builders and Investors Pvt. Ltd Vs. Vinod Kumar Alag[x]


Some Case laws where MOUs have been declared as legally non-enforceable documents:


1. Monnet Ispat and Energy Ltd Vs Union of India and Ors. [xi]

2. Jyoti Brothers Vs Shree Durga Mining Co.[xii]


Agreement:[xiii]


A promise or a number of promises that are not contradicting and are accepted by the parties involved is an agreement. An agreement may or may not be a contract.

The Indian Contract Act 1872, section 2(e)[xiv], defines an agreement as "every promise and every set of promises, forming the consideration for each other is an agreement." A promise is essentially an offer or a proposal, made by a person or an entity, towards another.

There are two types of agreements:

  • Written agreements

  • Oral agreements

A Written agreement is a legal document summarizing agreement between parties and some contractual relationships between them expressed in nature.


An Oral agreement is a type of agreement in which the terms are agreed upon by spoken communication just as a symbol maybe implied or expressed.


A valid written agreement has a stronger form of evidence in the court of law, but oral agreement lacks this strength even though it is enforceable as same as a written agreement. It is a difficult task for the court to ascertain the true nature of facts and terms of the agreement, without the invasion of bias.


Difference between MOU and Agreement:


Meaning

  • An MOU is a legal document which describe the terms of an agreement between two or more parties forming a bilateral or multilateral agreement.

  • An Agreement is a document in which two parties agreed upon work together for a common objective.

Elements

  • Offer, Acceptance, Intention and Consideration.

  • Offer, Acceptance.

Enforceability

  • An MOU cannot be enforceable in the court of law.

  • Whereas an agreement can be enforceable in the court of law.

Binding Nature

  • It is binding on the parties if the memorandum is signed in exchange for monetary consideration.

  • It is always binding on the parties to the agreement

Collateral Right

  • An MOU doesn't have a collateral right.

  • Agreements include collateral rights.

Form

  • Written

  • Oral or Written


Conclusion:


From the points that have been discussed above we can come to a conclusion that it is better to enter into an agreement straight away rather than entering into an MOU so that it can be challenged in a court of law at any point.


[i]https://www.thenewsminute.com/article/row-over-deep-sea-fishing-kerala-govt-cancels-MOU-us-firm-143954 [ii]Definition of MOU: https://en.wikipedia.org/wiki/Memorandum_of_understanding [iii] Section 2(a), Indian Contract Act, 1872 [iv] Section 2(b), Indian Contract Act, 1872 [v] Section 2(d) & 25, Indian Contract Act, 1872 [vi] Specific Relief Act, 1963: https://legislative.gov.in/sites/default/files/Specific%20Relief%20Act%201963-47.pdf [vii] Indian Contract Act, 1872: https://www.indiacode.nic.in/bistream/123456789/2187/1/A1872-9.pdf [viii]AIR 1976 Ori 4 [ix]93 (2001) DLT 496 [x]AIR 1993 Delhi 315, ILR 1991 Delhi 303, 1991 RLR 87 [xi]W.P.(C) 1501/2015 & CM Nos. 2644/2015 and 4395/2015 [xii]AIR 1956 Cal 280, 60 CWN 420 [xiii] Section 2(e), Indian Contract Act, 1872


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