What is a memorandum of understanding (MOU)?

A Memorandum of Understanding is a formal agreement between two or more people that have agreed to enter into a contract. It is usually executed by government organizations and non-government agencies, but sometimes by corporates.

A Memorandum of Understanding (MoU) is a “meeting of the minds” between the parties that helps to understand the purposes, goals, obligations, and roles of the parties.

Purpose of MoU

A Memorandum of Understanding can be entered into a variety of situations where-

1. The parties do not intend to form a legal relationship.
2. The parties want to have a mutually beneficial partnership;
3. Want to sum up the mutual conditions of all transactions

Examples: MoU entered by two universities, Professional institutions from various countries, between two governments or government bodies of different states or countries.

Intention of MoU

MoUs are agreements that do not need to be legally binding. Memorandum of understanding between two partners are used to signify a commercial partnership, not to create legal obligations. MoUs can be used to limit the roles and goals of the parties in a commercial partnership.

Steps required to draft an MoU

Step 1: Planning Phase: Each party expresses its needs, goals, objectives, and negotiable points.

Step 2: Drafting Phase: Parties then draft the initial MoU.

Step 3: Negotiating phase: The MoU usually outlines guidelines for the mediation process.

Step 4: Timeline negotiations: After the parties have completed negotiations, they establish a time frame for the MoU’s implementation, its expiration date, and any termination rules.

Step 5: Restrictions: Finally, each party adds any restrictions or disclaimers and signs the final MoU.

The contents of an MoU

MoUs are written statements of the intent between the parties. They usually jot down the desired action. MoU can be used in all situations where there is no formal contract. The following requirements are essential for an MoU:

1. Proposal or Deal: One party to the MoU must present their proposal to the other parties. They should also clearly state any promises or obligations, purpose, and intention, if any. If there are any timeframes involved, they should be drafted appropriately.
2. Acceptance of the Deal or Proposal: The other party to the MoU should acknowledge the proposal made and expressly accept it.
3. The intention of Legal binding: Parties may indicate in the MoU whether certain clauses are binding and enforceable or not. An agreement that is explicitly called an MoU does not override the binding effect. It depends on the intention of the parties and how the clauses are drafted. The Supreme Court in Kollipara Sriramulu v. T. Aswathanarayana and Ors ruled that “a simple reference to a future formal agreement will not prevent the parties from entering into a binding contract.”
4. Consideration: The MoU must clearly state the scope and mode of consideration. Each party can avail the benefits of the agreement.

The following clauses are essential for the formation of an MoU, in addition to the ones already mentioned:

1. Parties: The MoU should include the details of each party along with a brief description of their business or activities.
2. Duration: The Memorandum should specify the validity period, i.e., From the date of commencement to the expiration date; the terms of extension of the memorandum; events under which the memorandum can be altered, amended, or terminated by the parties.
3. Signatures: If the Memorandum is to be signed by any party, such as a Corporate or Cooperative Society, a representative of that organization, like the Chairperson, Head of the Department, or CEO, should sign it on behalf of such organization.
4. Confidentiality: The parties to MoU provide critical information to each other and the disclosing parties have an obligation to keep the data at safe custody.
5. Dispute Resolution: The MoU is not a standard contract and, therefore, not enforceable unless it is explicitly stated by the parties. MoUs do not contain a formal dispute resolution clause. Parties can either reach out to higher authorities or resort to mutual negotiations.

Advantages of MoU

1. Collective Intention: The MoU establishes a mutual intention for future engagement. It sets out the goals and objectives of the parties to the contract.
2. Reduces the risk of uncertainty: Business negotiations can be difficult and often confusing when the relations between the parties are established. Disagreements between the parties regarding the terms and conditions of the contract can have dire consequences. MOUs provide safety measures that reduce uncertainty and help in clarifying expectations. This is because the terms of the MOU are already agreed upon and set forth by the parties. This is especially beneficial in commercial partnerships and relationships where the engagement lasts for a long time.
3. Documentation of prior understandings: Parties agree to certain terms and conditions during negotiations which provides them with a clear understanding of their common goals. Also, MoU provides a secure platform where confidential information can be shared.
4. Outlines future business opportunities: Even for highly-skilled business people, entering into formal contracts can seem overwhelming if the transaction is complex or spreads over a prolonged period. So, an MOU is a useful tool for parties because the terms of the proposed contract are written down in detail and provide a framework for future transactions. If there is any confusion, the MOU can be used to establish the foundation for future contracts and can be referred back to as a reminder of the parties’ intentions and objectives. It is best to prepare a formal document before entering into high-risk situations to make sure everyone is on the same page.

Disadvantages of MoU

The idea that MOUs are not legally binding and can be canceled without any legal consequences allows the parties to leave the agreement at any time they wish.

Enforceability MoU

MoU is a document that outlines the agreement between the parties. MoU is not like a contract, however, MoUs that meet the conditions of Section 10 of Indian Contracts Act, 1872 (i.e., If there is a valid offer, acceptance, and lawful consideration), such MoU will be legal and enforceable according to the Specific Relief Act of 1966.

The legal enforceability and validity of an MoU depends on its drafting, contents, duties, and obligations. The MoU can also be made binding by the addition of an indemnification, dispute resolution, or applicable law clause. These clauses require the parties to follow the MoU’s terms.

If an MoU explicitly states that it is binding, the MoU has legal enforceability.

Stamp Duty on MoU

It is recommended to register the MoU in order to enforce it. MoUs that deal with monetary exchange should be registered in order to protect the interests of the parties.

International MoU

An international MoU is a contract that is created in the same way as a treaty and is registered under the United Nations Treaty Collection. These MoUs must be registered in order to prevent secret diplomacy, and sometimes they are kept confidential.

The enforceability of international MoUs is determined by the intent of the parties as well as the language used to draft them. In determining the enforceability of an international MoU, the legal position of the parties is crucial. These are subjected to the jurisdiction of the International Court of Justice.

The International Court of Justice established a set of standards to ensure the legality of the MoU.

International MoUs are signed between the parties for exchanging technical products, researching plans or for the student exchange programs.

Conclusion

The Memorandum of Understanding should be drafted by someone who is familiar with the purpose and intention of the parties. When drafting the Memorandum of Understanding, make sure it is precise and concise. It is important to be careful and use appropriate language, titles, and clauses.