Enforceability of Memorandum of Understanding (MOU)

INTRODUCTION

Memorandum of Understandings is a preliminary understanding between the parties to the contract, prior to the execution of a formal agreement. It highlights the intention of the parties. MOUs are also Letter of Intent (LoI). It is execute to have consensus between the contracting parties for future contracts. It is not intend to have create any obligations upon the parties.[1] It embodies the understanding of parties with respect to a particular transaction or project one wishes to undertake. MOUs are only agreements or promises between the parties. MOUSs are govern according to the Indian contract Act, 1872.  According to the Indian Contract Act, every agreement is not a contract.  Only those agreements which are legally binding are contracts that are enforceable by the court of law. A pertinent question that often arises is whether MOUSs are legally binding?

MoUs are enforced under the Specific Relief Act. When a MoUs does not fulfill the conditions of a contract under the Indian Contract Act, 1872, then the court may hold that MoUs as invalid.

LEGAL PERSPECTIVE

The Supreme Court of India, in case of State of Orissa & Others v. Titagar Paper Mills Company Ltd. & Ors,[2] has laid down 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 determine from all the terms and MoUs clause of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses.’

Section 10 of the Indian contract Act, 1872[3] lay down the essential requirement of a legally binding contract-

• There must be an offer made by one party and accept 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 consider as insolvent/bankrupt
• There must be a lawful consideration
• There must be a lawful object
• Also there must be an intention to create legal relations

A memorandum of understanding to be capable of specific performance must fulfill all the above points. Because if it lacks the intention to create legal relations, then it is not a contract and is therefore incapable of specific performance. The legal nature of a MoUs rests on the rights, duties, obligations, it creates among parties.[4]

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.[5]

NON-FULFILMENT OF CRITERIA

If the MOU does not fulfills the above criteria or essentials of section 10 of the Indian Contract Act, then also the parties have the right to approach the court on the basis of the Principle of Promissory Estoppel and equity. In the landmark case of Motilal Padampat Sugar Mills co. Ltd. v. state of Uttar Pradesh[6], the court held that the doctrine of promissory estoppel is a principle evolved by equity to avoid injustice and so whereby a promise has been made by a person knowing that it would be acted upon by the person to whom it is made, and in fact, it is so acted upon, and it is inequitable to allow the party making the promise to go back upon it.

In order to enforce a MoUs, it should contain both binding and non-binding terms. The parties can also register the MoUs to enforce it by mentioning certain statements and documents. In the case of Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors.[7] the Supreme Court has held that if the conditions to the MoUs are otherwise act upon, the parties to the MoUs will get the benefit arising out of the MoUs.

In the case of Monnet Ispat and Energy Ltd. v. Union of India and Ors.[8], the Supreme Court held that a Memorandum of Understanding is not a binding contract and therefore, does not come within the meaning of Article 299 of the Constitution of India.

In Millenia Realtors Private Limited v. SJR Infrastructure Pvt. Limited[9], the Karnataka High Court held that MoUs are not to be construed as contingent contracts and are capable of enforcement.

In the case of Nanak Builders and Investors Pvt. Ltd. v. Vinod Kumar Alag,[10] held that the nature of the document is not decided on the heading but on the content that is written. Mere heading or title of a document cannot deprive the document of its real nature.

In BrikramKishore Parida v. Penudhar Jena,[11] held that the test of an intention to create legal relations is an objective one. It may be that the promisor never anticipated that his promise would give rise to any legal obligation but if a reasonable man would consider that he intended to enter into a contract, then he will be bound to make good on his promise.

CONCLUSION

The enforceability of the Memorandum of Understanding depends upon the intention and negotiations between the parties. The intention of the parties is reflected in the terms of the MOUSs. As it is clear from the above discussion that the MOUS will be binding if it fulfills the conditions of a valid contract as according to Section 10 of the Indian Contract Act. While executing the MOUS, the intention of the parties is interpreted from the terms and conditions of the memorandum and also its conduct post the execution of the Memorandum.

It is very important for the parties to be cautious while drafting and executing the memorandum. To enforce the memorandum, it is very necessary that the clauses such as jurisdiction clause, governing law clause, indemnification, etc. have binding effects to the agreement. The language, titles, and clause of the memorandum must be carefully drafted. There can be the use of the word ‘shall’ to have the binding effect.

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References:

[1] Alba Law Offices, Enforceability of a Memorandum of Understanding, Legally India, 25^th November, 2016, https://www.legallyindia.com/views/entry/enforceability-of-a-memorandum-of-understanding.

[2] State of Orissa & Others v. Titagar Paper Mills Company Ltd. & Ors, 1985 AIR 1293.

[3] Indian Contract Act, 1872, Section 10.

[4] Abhishek Sahoo, Is Memorandum of Understanding (MoUs) Legally Binding in India?, My Advo, 13^th September, 2019, https://www.myadvo.in/blog/understanding-the-legality-of-memorandum-of-understanding/

[5] Id.

[6] Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh, AIR 1979 SC 621.

[7] Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors. 2006 (4) SCJ 401.

[8] Ispat and Energy Ltd. v. Union of India and Ors. (2012) 7 SCR 644.

[9] Millenia Realtors Private Limited v. SJR Infrastructure Pvt. Limited,  2005 (6) KarLJ 36.

[10] Nanak Builders And investors Pvt. Ltd. vs.  Vinod Kumar Alag, AIR 1991 Del 315.

[11] BrikramKishore Parida v. Penudhar Jena, AIR 1976 Orissa 4.