What is Memorandum of Understanding?

I am planning to start a Company. One of my colleagues told me that Memorandum of Understanding cannot be considered an element of contract. Is it true? What is Memorandum of Understanding?

In general term it is a document which expresses mutual accord on an issue between 2 or more parties. In today’s modern business world most of the organisations enter into or negotiate with their potential business partners a preliminary agreement which is called as Memorandum of Understanding (MOU).  MOU is usually used for non-binding agreements.  As per Indian Contract Act 1872 not all agreements are contracts but only those agreements which are binding are enforceable by the court of law. The court usually takes into consideration the intent of the parties to decipher from contents and material provisions of MOU. It has to draw a distinction on whether the parties intended that MOU be an informal agreement which is an incomplete and just an agreement to agree or whether it is a complete contract itself on which parties bind themselves. While drafting the MOU its language, titles, clauses are to be made by in a very cautious way. Generally MOU’s are recognised as binding, although no legal claim can be based on the rights and obligations are laid down.

For MOU’s to be legally operative it must:

  • Identify the contracting parties;
  • Spell out the subject matter of agreement and its objectives;
  • Summarise the terms of agreement and;
  • Signed by the contracting parties

In Ksl & Industries Ltd vs National Textiles Corporation on (14 August, 2012) Court held that, MOU that was in question does constitute a binding contract between the parties and also held that termination of the MOU was irrational and illegal. In Millenia Realtors Private vs Sjr Infrastructure (Private) on 1 August, 2005 Karnataka High Court observed that the Trial Court was wrong in holding the MOU document of the parties was not enforceable in law.

MOU is an important agreement document but enforceability of it depends on the circumstances of the negotiations and terms that the parties have agreed up on in it.  MOU’s do provide some kind of commitment to the parties but it does not provide 100% certainty to the outcome of the dealing.

by Sushma Javare.