It is a legal document between two parties or companies that states that both have agreed to commence business together under rules and regulations.
This explicitly states that a contract can be formed in the future without being legally binding at this stage.
What is an MOU?
This agreement is written between two parties who want to proceed with commencing a business with mutual consent. They follow certain terms and conditions as they form an MOU.
A Memorandum of Understanding (MOU) is not legally binding but is an earnest declaration by the companies that they will do the needful for continued business with each other.
- MOU between two companies is used to specifically state the points of an agreement.
- The MOU between two companies provides details about two companies and identifies them and their terms and conditions.
- It explains the project details and what the companies agree to form.
- The scope of the business is stated elaborately.
- The roles and responsibilities of the companies are defined thoroughly to form a base structure before starting the actual part.
A sufficient amount of time is input during the drafting of an MOU, which should contain details and negotiations from the parties.
- This might not be enforced legally but can be binding in many ways.
- A mutual understanding is very crucial to forming an MOU between two companies that will thereby start a business contract.
- Each party may form their version of the MOU with possibilities and scenarios which are deemed safe and productive.
- They state some basic points for the other party to agree on or negotiate with before forming the original contract so that any changes that may be required on the MOU agreement can be altered.
What are the benefits of forming an MOU between two companies?
The companies have several advantages at hand by forming an MOU between two companies before agreeing to an actual contract that is legally binding and enforceable.
The benefits are as follows:
- A common objective:
- It is paramount that each party understands and establishes its objectives and intentions regarding the business. This is a basic nature of any business dealing, which can then be turned into a contract if both parties agree.
- MOU agreements can function as a part of advantages in the official relationship by acting as an efficient asset.
- Through the MOU between two companies, fair dealings and commitment is established.
- Reduced uncertainty:
- The parties present their intentions and goals in front of the other parties through an MOU between the two companies, so negotiations can be resolved in time to form the final contract.
- If any party wants to change or leave the agreement, they can choose to do so without any penalty, as the actual contract wasn’t yet made. This was just like a draft of what could be done to start the business together.
- Maintaining previous records:
- The parties agree on some terms or duties during the making of an MOU between the two companies but may forget about it later on, so drafting the MOU helps in reviewing those agreed terms.
- This isn’t legally binding but acts as a supplemental source for previously made mutual decisions.
- Recalls the objectives and intentions regarding the business.
- Structure and framework maintenance:
- MOU between two companies provides a structured framework for commencing a business and securely running with utmost professionalism.
- It helps in settling future disputes or complications that may arise due. MOU acts as evidence of their terms and agreement.
- Security in partnership:
- Any emerging facets are covered and reviewed by drafting an MOU between the two companies.
- Long-term plans and associations can be carried out sustainably by having an MOU between two companies. Other times they might opt for legal consultancy services.
- Saves effort and time:
- Identical deals with the parties are balanced and bargained using MOU between two companies.
- The requirements are properly met by having a prior agreement.
Process of Drafting an MOU in India
It can be formed between two or more parties willing to start a business together and later form an official, legally binding contract. Legal consultancy services might be needed to draft a proper MOU between the two companies.
Certain laws govern its functionality. Section 10 of the Indian Contract Act 1872 prescribes legally binding contracts and agreements.
- One party must offer another party or parties to form an MOU between two companies.
- The parties should agree to form an MOU without any fraud, pressure, forgery, or coercion.
- The parties who are making the MOU between the two companies should be above 18 years old and not be of unsound mind.
- Insolvent or bankrupt parties cannot enter a contract.
- A lawful object and consideration are required.
- The intention of entering into a contract must be present to form an MOU between two companies.
Components of MOU
These components are as follows:
- Information about the agency.
- The identification and contact details of the recipients.
- The contact and identity information about the service provider.
- Commitment to detail and proof.
- The service provided should be elaborated with a brief description.
- Business scope and intentions.
- Contract duration that needs to be specified.
- Clients are giving and receiving service.
- An estimate of the services and valuation.
- Necessary documents and revising.
The MOU is an important document that explains the terms and conditions of the business that is to be commenced. This acts as the basis for starting any business, which will form a contract.