A memorandum of understanding is commonly known as a gentleman’s agreement or a letter of intent between two parties. Mou is generally a non-binding agreement and is not enforceable in India. A memorandum of understanding entails the terms and conditions of a transaction or project that two corporations wish to undertake. There are a few requirements that make a Mou legally binding.
Types of MOU
1. Legally Binding MOU: Parties may have no intention of making any kind of final agreement at all. They simply create a Mou, which they view as a complete and legally enforceable agreement. Governmental entities, international organizations, nonprofit organizations, and research institutes usually do this.
2. Non-Binding MOU: The courts have the power to determine whether or not to enforce the binding nature of the Mou by examining the wording. This group includes all the ambiguous situations where it is challenging to determine what makes a Mou legally binding.
Requirements that make an MOU legally binding
Section 10 of the Indian Contracts Act 1872 lays down specific provisions and essential needs that make a Mou lawfully binding and enforceable
- There must be an offer that is caused by one party, and there must be accepted by the other party
- The parties to the contract must consent to the undertaking, and their consent must not be obtained by fraud, coercion, or under undue influence.
- The parties must be competent to enter into a contract to make the Mou legally binding.
- The parties must be above the age of 18 and must be of a sane mind and not bankrupt.
- There must be lawful consideration to make the Mou legally binding
- The intention to create legal relations will make the Mou legally binding
The intention of the parties is very important. If there is no scope for legal relations or to create a legal relationship, then this would not make a Mou legally binding as it is incapable of specific performance.
The language that makes the MOU legally binding
Importance must be given to the language used while drafting a Mou. The general rule of law is that words used to express a legal intention and have a binding nature make the Mou legally binding on the parties to the contract. Using words like “shall” instead of “should be” and “may” instead of “can” expresses a clear intention and a legal obligation, making the contract valid. If the Mou contains terms such as “usual term” or “fair and equitable price,” then it would be interpreted as vague and not valid to make the Mou legally binding and enforceable.
Enforceability of the MOU
The following four requirements must be met for the Mou to be enforceable:
1. The Specific Relief Act of 1963 may be used to ensure an MOU’s performance if it satisfies the requirements of the Indian Contract Act of 1872. When compensation cannot be determined in monetary terms, specific relief is given.
2. A Mou is not a legitimate contract if it does not adhere to the requirements of the Indian Contract Act 1872.
3. A Mou legally binding the parties may be enforced in court based on the concepts of promissory estoppel and equity.
4. A Mou legally binding the parties to the contract must contain both binding and non-binding clauses to be enforced, and if a clause is non-binding, that fact must be stated in the agreement.
5. A Mou, legally binding the parties to the contract, serves as a representation of the parties’ shared expectations. The creation of a formal contract indicates the validity of a contract
In an international memorandum of understanding, two countries agree to work together and form an agreement or contract. An international Mou legally binding two parties belonging to two nations can take the form of trading products, delivering something in exchange for another item, exchanging plans, and so on.
The term “binding” or “non-binding” is not used in Mou’s title. Similar to a national Mou, the status of an international MOU depends on the parties’ intentions. A document’s enforceability, or whether the Mou is legally binding in nature, is determined by the language and wording used, as well as the legal standing of the signatories. The International Court of Justice helps to secure and protect these agreements.
There are a number of judicial pronouncements by different High Courts and the Supreme Court on the nature of Mou and what makes a Mou legally binding.
1) In the case of Bikram Kishore Parida vs. Penudhar Jena (AIR 1976 Orissa 4), the Supreme court determined that an objective test must be used to determine whether there was an intent to establish legal relations. “Even if the promisor may not have known that his promise would result in a legal obligation, he is nonetheless obligated to fulfil his promise if a reasonable person would believe that he meant to enter into a contract.”
2) The Delhi High Court declared in the landmark case of Structural Waterproofing & Ors. vs. Mr. Amit Gupta that the Memorandum of Understanding, which is otherwise legitimate, shall be applied, and the terms and circumstances of the Mou should bind parties.
3) The Supreme Court of India, in the landmark decision Motilal Padampat Sugar Mills Co. Limited vs. the state of Uttar Pradesh, A.I.R. 1979 S.C. 621, observed that “the doctrine of promissory estoppel is a principle evolved by equity to avoid injustice in situations where a promise has been made by a person knowing that it would be acted upon by the person to whom it is made, is inequitable to allow the party making the promise to go back on it.”
4) Furthermore, the Supreme Court held in Jai Beverages Pvt. Ltd. vs. State of Jammu and Kashmir and Ors. that “the enforceability of a Mou is determined by whether the parties to the Mou comply with its terms and get the benefits that flow from the agreement.”
In light of the above discussion, a Mou has special authority since it is an alternative to a legally binding agreement intended to establish a legal relationship between the parties. The contract can be quickly drafted with the help of an expert lawyer online who can ensure all the requirements are met to make the Mou legally binding and enforceable.
It can be concluded that the content, nature, language used, and intention of the parties to the contract determine its enforceability.