Memorandum of Understanding

Background/When used:

A Memorandum of Understanding (MOU or MoU) is a mutually agreed-upon,

arrangement between two parties that demonstrates their collaborative effort
to and understanding of the obligations of an agreement. It may or may not
take the form of a binding agreement, but it expresses a will between the
parties. There may be good faith or best-efforts responsibilities that the
parties assume in order to work out the commercials of a deal in the future.
These primarily serve as a means of recording the parties’ broad
understanding of a possible transaction

A memorandum of understanding (MOU) 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 and does not involve the exchange of
money. The document also usually addresses the time frames and deadlines
for the transaction, the price, and the method of payment.

It is a mutually agreed-upon, non-binding arrangement between two parties

that demonstrates their collaborative effort to and understanding of the
obligations of an agreement.

These primarily serve as a means of recording the parties’ broad

understanding of a possible transaction.

Drafting a memorandum of understanding, which details the main aspects

of the parties’ vocal conversations, has the following provisions:

- A brief document that formalizes the initial exchange of ideas between

the parties.
- It acts as a foundation for later creating a formal contract and
- Represents the parties’ shared understandings.

Here are a few examples of typical MoUs used by companies:

1. Joint Venture MoU-

Drafting a memorandum of understanding for a collaboration
agreement may be used at the initial stages of discussions with a
couple of parties. A temporary business agreement known as a joint
venture allows two or more parties to collaborate on projects in order
 to achieve a common objective. All of the parties’ obligations are
outlined in the contract.

2. MoU for a service contract

A service agreement, which is a legally enforceable contract between a
service provider and a client, specifies the conditions and restrictions
of the services that will be provided. For instance, building contractors
use a service agreement to describe the home improvements they are
performing for a client and to specify how they will be compensated.

3. Asset Purchase MoU

A contract known as a property purchase agreement is made between
a buyer and a seller to transfer ownership of an item for a specific
price.

What is Covered in an MOU Between Two Parties?

- Points of understanding: A MOU specifies the precise areas of

understanding in great detail. It includes the parties’ names, the task
that they are working on, the assignment’s purpose and duties, etc.
- Terms and Conditions: The terms and conditions of the contract are
also included in the MOU. The terms and conditions must be agreed
upon by each party.
- Information about the parties: The MoU includes information on all
parties to the arrangement. Typically, this includes names, addresses,
and other contact details.
- Signatures: To indicate an understanding among all parties, all MoUs
must have the signatures of all parties.
- Purpose: An MoU specifically states the agreement’s objective.
Additionally, it establishes the endeavor’s timeline, key dates, and
roles and obligations.

Legal Enforceability of an MOU-

As mentioned earlier, an MOU is not usually legally binding. In the case of

Jyoti Brothers vs. Shree Durga Mining Co the Calcutta High Court held
that the Court will rely upon the degree to which such understanding is
signed between the parties and whether any of them has acted in reliance
on such understanding. Contrarily, in the case of Jai Beverages Pvt. Ltd.
v. State of Jammu and Kashmir and Ors the Supreme Court held that if
an MOU is in a formal shape and if the parties benefit from acting in
accordance with the terms listed out in the MOU, it can be considered as a
legally binding agreement. MOUs are governed under the Indian Contract
Act, 1872 and are enforced under the Specific Reliefs Act, 1963. As per the
Indian Contract Act, an MOU becomes a contract if it fulfils the conditions
laid down hereunder. There should be:

- An offer
- Acceptance
- Valid consideration

If an MOU fulfils all the requirements for being a valid contract, it becomes
legal under the Indian Contract Act and thereby enforceable under the
Specific Reliefs Act, 1966.

Also, if the conditions of the Memorandum of Understanding are therefore

complied with, the parties to the MoU will receive the profit resulting from
the MoU. As stated above, it leads to the conclusion that the binding nature
of a Memorandum of Understanding is dependent on the intention of the
parties, the language used in the agreement, as well as the nature of the
agreement. The conduct of the parties following the execution of the MoU is
also a pertinent factor in determining the enforceability of the MoU.

In the case of M/s. Nanak Builders and Investors Pvt. Ltd. v Vinod
Kumar Alag (1991), it was held by the Delhi High Court that the legality of
the MoU would depend on the contents and nature of the agreement. For
ascertaining the enforceability of the MoU, the intention of parties is to be
seen through the clauses of the MoU. If it could be deduced from the MoU
that the parties intend to enter into a binding agreement, then MoU could be
legally enforceable.

Legality and enforceability of an MOU often depend on the contents of the

MOU, the language used, as well as the duties and obligations listed out in
the MOU. An MOU is often an ‘agreement to agree’ and does not create
obligations upon the parties. Addition of an indemnification clause, dispute
resolution clause and applicable law clause can make the agreement
binding. This is because these clauses create obligations on the parties to
follow the terms specified in the MOU. Similarly, adding an explicit clause
for making the MOU legally binding can also result in the legal enforceability
of the MOU. The language used in creating an MOU is also pivotal in
deciding its legality.

Differences between the letter of intent, memorandum of

understanding, and contract
Sr
Basis Letter of intent MoU Contract
no.

It is prepared and
signed by one
Parties Two or more parties Two or more parties
1 party and is
involved are involved. are involved.
accepted by the
other.

It encompasses the
It contains several roles and It encompasses
Contents of important points responsibilities of the every detail
2 the agreed upon parties to which they regarding the
instrument before finalizing have to adhere to agreement to be
the deal. before entering into performed.
the contract.

It is almost like a
It is framed to
prior agreement
indicate one’s It is a final
agreed upon by both
Intention for intention to enter agreement that is
3 parties which
formation into the legally binding on
provides, a
prospective both parties.
framework for future
contract.
contracts.

It is the document
prepared at first In the end, the
It is next in line in
showcasing the contract is formed
Order of which an outline is
4 intention of one which was the
formation prepared regarding
party to enter into ultimate objective of
the material terms.
a contract with the parties.
another party.

All the valid

contracts are
It is not binding It is also not binding
binding on the
5 Binding unless the parties unless the parties
parties and they
intend so. intend.
have to stick to the
contract.

6 Legal It is ordinarily not The terms of MoU are All the valid
 contracts are legally
not enforceable by
enforceable and if
law per se but if the
any party deviates
legally intention of the
enforceability from the contract
enforceable. parties is such that
then such party can
then it can be
be held liable for the
enforced.
same.

Essential of an MOU-

- Identify the parties: It should specify the name of the parties between
whom the memorandum of understanding is being signed.

- Purpose: It should clearly specify the purpose and the goals for which
the memorandum is being signed.

- Duration: The memorandum should specify the duration of such an

agreement between the parties i.e the beginning and the ending dates
of the memorandum. Also, it should provide for the circumstances in
which such a memorandum will be terminated.

- Meeting and reporting: It should specify the plan for the meetings
between the parties. For instance, parties can decide to meet at least
once a quarter.

- Financial considerations: The memorandum should specify the

amount of capital contribution to be made by the parties. It should
also mention the person authorized to make the major financial
decisions. The financial record keeping of the assignment/program
being undertaken should also be maintained.

- Duties and Responsibilities: This is yet another crucial part of the

MOU where the duties and responsibilities of the parties are clearly
identified. It is always a better practice to list down the duties and
responsibilities of each party separately. Shared responsibilities
should also be expressly provided. Provided this clause directly
affects the purpose of the MOU as well as the interest of the parties.
Hence, it is always drafted with clarity and is often the lengthiest part
of the MOU.
- Confidentiality: Confidentiality expectations of the parties are
described within this clause which mandates the parties to stick to
the privacy provisions of the transaction. This section can be used
especially when the transaction involves sharing of intellectual
property or other secrets which has to be protected from access to a
third party.

- Scope of the transaction: Role of all third parties and other agencies
involved in the transaction should be decided by the parties. All the
exclusions and inclusions in relation to the partnership should be
stated to avoid uncertainties.

- Indemnification: This clause governs situations when something

happens unplanned or accidental to the mutual collaboration agreed
by the parties in advance. Specifying the party who bears the risk of
the transaction is crucial. It makes sure that the responsibility during
such instances is not merely assumed. A provision for
indemnification should be mutual in nature and each party shall
indemnify the other for all the losses caused due to the negligent
behaviour of such party. The parties should also make sure that
there should be a mechanism for the actual payment of the losses
since a mere willingness to pay will not rectify the harm caused to the
opposite party.

- Conditions for Alteration and Termination: The conditions upon

which the terms of the MOU are amended or altered are agreed upon
by the parties within this section. Parties can also agree upon a
notice period by which a party can terminate the MOU by serving
notice as per the provisions under the notice period.

- Restrictions: The parties can also set out restrictions on the other
party such as privacy statements and disclaimers related to certain
provisions or in compliance with certain statutes.

- Dispute Resolution: Unlike standard contracts, an MOU is not legally

enforceable unless the parties expressly provide for the same. Hence,
a formal method for dispute resolution such as arbitration is
normally avoided in an MOU. When disputes occur, the parties
should agree to resolve disputes in good faith through mutual
negotiations. If the disputes remain unsettled for a prescribed period,
the disputes should be referred to the higher officials of the
 organisation for whom the parties represent. In any case, if the
dispute still continues the parties can agree to a mechanism other
than the ones specified under this clause for settling the disputes.

- Signed with dates: Once the MOU is prepared and agreed upon by
parties involved, it should be signed and dated by the authorized
individuals representing each party or organization.

Things to keep in mind while drafting an MOU

It is quite obvious that the parties to the MOU do not intend the agreement
to be legally binding. But poor drafting can make the MOU pointless. Hence,
it is crucial that the MOU should be drafted in such a way that it serves the
purpose of the parties.

- If the parties want the agreement to be legally binding they should

expressly state that in the MOU.
- Although an MOU in general is a non binding document, certain
provisions in an MOU can have binding effect.
- The parties should add various provisions in a coherent manner.
Meanwhile, one should always understand that an MOU can become
binding even if its not made deliberately. Utmost care must be
exercised while drafting, to prevent the MOU legally binding as a
result of a mishap.
- Adding a provision with the intention to make it legally binding such
as a confidentiality provision, privacy provision or dispute resolution
can make the MOU legally binding.
- If the terms of the MOU are similar to that provided in a legally
binding agreement, then those provisions can make the MOU
binding.
- Use of softer language which does not impose strict obligations upon
the parties should be considered while drafting the MOU. Inclusion of
excessive detail with regards to payment, delivery of services etc
should be avoided.
- Organised structure is very much essential for a good draft. Hence, it
is always a common practice to rely on a template.
- If the MOU is created by the parties themselves, it is advisable to
check the same with a lawyer so that it doesn’t become legally
binding by accident.