Meaning of Memorandum of Understanding
A memorandum of understanding (MOU) is an agreement between two or more parties. It is also known as a Letter of Intent in India. It is a way in which two parties reach a decision. An MOU is an agreement that is entered into when parties have agreed to enter into a contract. However, formalities like establishing the terms and conditions of the contract are yet to be negotiated. An MOU is a great way of outlining the rights and obligations of two parties and get them to the table for initial discussions. It is usually used as a way to measure the intentions of the transacting parties before a deal is finalized and officially signed. The MOU’s can be kept confidential if needed. Although they are not legally enforceable, they can be a useful tool to establish common intentions between two or more parties. Below listed are a few Best practices and steps of Drafting an MOU that works for the parties involved in signing the MOU.
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Contents of Memorandum of Understanding
Following are the content of MOU:
– The Objective of entering into MOU
It is important to state the overall intent of the MOU that has a brief description of the overall intent of the parties involved.
– The Parties
This clause describes the parties to the agreement.
– The Period
It is important to specify a time period with start and end dates.
– Responsibilities of each party
This is an important clause in the MOU which describes the duties and responsibilities of each party. List each group’s sole responsibilities, followed by a description of shared responsibilities, if any.
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– Financial Support
This clause specifies which entity will pay for each item and when payment is due and to whom. It is important to spell this out clearly to avoid any confusion and disputes.
– Confidentiality Clause
In case the two parties decide that the MOU must be kept confidential then this clause may be added in the MOU.
– Indemnity Clause
This clause is an indemnification provision, promising that Party A will pay for losses suffered by or caused by Party B due to any negligent acts or omissions during their dealings.
– Dispute Settlement Clause
In case of a dispute between the parties involved due to a breach, invalidation, or termination of MOU, such disputes must be promptly resolved through direct negotiation. The manner in which the dispute shall be settled should be mentioned in this clause.
– Termination Clause
Each Party shall have the right to terminate the Memorandum of Understanding by giving a formal notice of a specified number of months as mutually decided by the parties.
Depending on the type of business and nature of transactions the contents of an MOU will differ. Clauses may be added or removed accordingly with mutual consent among parties.
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MOU Format – Template
MEMORANDUM OF UNDERSTANDING
WHEREAS, the Parties have decided to undergo the business of [description of business];
WHEREAS, the MOU shall be effective from [date];
NOW, THEREFORE, this Memorandum of Understanding (MOU) sets the following terms and understanding between the (partner) and the (partner) to (insert activity).
- Objective/ Purpose of entering into an MOU
- Parties involved
- Duration of the Partnership
- Responsibilities of the Parties involved
- Financial Support
- Confidentiality Clause
- Indemnity Clause
- Dispute Settlement Cause
- Termination Clause
NOW WHEREAS, the effective date of this MOU is the date of the signature last affixed by the parties.
[Name and Title] [Name and Title]
Best Practices and Steps of Drafting an MOU
- Identify the Parties of MOU
- Understand the Objective/Purpose of entering into an MOU
- Make a plan for achieving the objectives
- Decide on what each party is bringing to the table
- Decide on situations where MOU cannot be applied or becomes invalid.
- Plan the Profit Sharing Ratios
- Include a Termination Clause in the MOU
- Initiate the formal drafting of the MOU. It is advisable to seek the assistance of a professional.
- Get the Final Draft Ready
- The Parties involved must sign the MOU.
Legal Validity of MOU in India:
Section 10 of the Indian Contract Act, 1872 lay down the essential requirements of a legally binding agreement or contract:
- There must be an offer made by one party and accepted by another
- The consent of the parties must be free and not affected by fraud, coercion, or undue influence
- The parties must be competent to enter into a contract. This means that they must be more than 18 years old, must be of sane mind, and not considered as insolvent/bankrupt
- There must be a lawful consideration
- There must be a lawful object
- There must be an intention to create legal relations
An MOU validity in India might fulfill the first-five requirements mentioned above. However, if it lacks the intention to create legal relations, it is not a contract and is incapable of specific performance.
When the parties merely record their understanding with a clause to negotiate and execute a formal detailed agreement in the future, such an understanding lacks consideration and intention to create legal relations. Hence, it is important to understand the nature of the relationship created by the parties. Therefore, unless an intention is clearly reflected from the language of the MOU, it is mostly considered non-binding from a legal standpoint. Hence,It is very important that we follow the Best practices and steps of Drafting an MOU.
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Enforceability of Memorandum of Understanding as per Law
MOU is governed by the Indian Contract Act, 1872, and if conditions under the Indian Contract Act are fulfilled, then the performance of an MOU can be enforced under the Specific Relief Act, 1963 where a Specific relief is granted when compensation cannot be ascertained in monetary terms.
In the case where the conditions under the Indian Contract Act, 1872, are not fulfilled, the MOU is not recognized as a legally valid contract. But, it can still be enforced in the court of law based on the principles of promissory estoppels and equity.
Who Can Use MOU?
- Companies or organizations can execute an MOU to establish partnerships with each other or individuals
- A Government Agency can execute an MOU with another agency within the same Government or another country’s Government,
- Countries can independently execute an MOU with another country/other countries,
- Trusts, etc.
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An MOU can seem unnecessary if you are planning on entering into a proper formal contract that includes lawful consideration and intention to create legal relations. However, it can prove to be an extremely valuable tool. Don’t undermine the benefits of using an MOU. It will not only help in establishing a clear relationship and common intention between the parties but it will also help in speeding up the negotiation process since certain basic terms are already set and agreed upon. If you are unsure whether you should use an MOU, contact a business lawyer to help you get started.
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