Legality of Memorandum of Understanding

It is commonly used as non -binding contract which is used to describe the intention of the parties involved in the business relationship.

According to Indian Contract Act 1872, every agreement is not a contract. Only those agreements which are enforceable by court of law are legally binding are contracts. 

What is a Memorandum of Understanding (MoU)?

In essence, a Memorandum of Understanding (MoU) means the cognizance by both the parties with respect to a particular transaction or a project which they wish to undertake. However, the mere existence of a document in order to give effect to an understanding concluded between the parties does not necessarily lead to the conclusion that such agreement is a contract.

Requirements of Essential Valid Contracts:

• One party must make an offer, and another party must accept it.
• There shall be free consent of the parties and shall not be affected by fraud, coercion, or undue influence
• The parties must be competent to enter into a contract i.e of sound mind and major
• There shall be a lawful consideration
• There shall be a lawful object
• There shall be an intention to frame legal relations

Landmark Judgement:

Supreme Court in case of State of Orissa & Others v. Titagar Paper Mills Company Ltd. & Another, has stated that, “It is true that the nomenclature and description given to a contract are not determinative of the real nature of the document or of the transaction thereunder. These, however, have to be determined from all the terms and MOU clauses of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses.”

Contents of MoU:

1. Description of Parties
2. Description of subject matter
3. Scope
4. Roles and Responsibilities of all parties
5. Indemnification
6. Termination
7. Dispute Resolution
8. Can include Consideration

Validity of MoU:

a) An Offer

b) Acceptance

c)Intention to be legally bound

d) Consideration

 When the same language as used in a contract, to create a binding relation, is also clearly mentioned in the MoU, it becomes open to being held legally valid agreement as well as enforceable as a contract.

Lead India has a team of lawyers who are well versed in drafting and are skilled to draft a legal binding contract as per your business requirement.