Drafting an MoU in India

A Memorandum of Understanding (MoU) is basically a form of non-binding mutual agreement between two entities to show that they have a common understanding of and commitment to the responsibilities of an agreement. In simpler words, it states that there is a general understanding between two parties related to a potential transaction that both of them wish to engage in. In a way, it can be considered as a preliminary agreement between two parties before they sign a formal, legally binding agreement for the transaction.

MoU is usually utilized in the first round of negotiations for any transaction to ensure all interested parties are on the same page, i.e., there is consensus ad idem. Once it has been signed, the MoU serves as a reference draft to outline terms of agreement in the final formal document.

Types of MoU

• Joint Venture MoU, also referred to as co-venture agreement, is majorly used right at the beginning of negotiations between two parties. It acts as a temporary business agreement between the two entities and defines their responsibilities. There are two types of Joint Venture MoU – Contractual Joint Ventures & General Joint Ventures.
• Service Agreement MoU is a service contract legally binding between the client and service providers. They define the terms and conditions of the agreement and are used in the early stages of negotiations as well.
• Outsourcing MoU is generally a contract between a company and a service provider, where the latter is supposed to provide services that the former shall then outsource.
• Asset Purchase MoU is an agreement between a buyer and a seller that shall be used to transfer the ownership of an asset. Through this, the seller has a clear understanding of which assets are to be purchased and which are to be sold in an asset agreement.
• Share Purchase MoU is vital to purchase shares. Any individual who buys shares of any company would need some type of contractual agreement, also known as ‘warranties’, that will continue to bind the shareholders, even after the sale is complete.

Enforceability of MoU

The enforceability of MoU may vary depending upon the principle governing legislations, i.e., the Indian Contract Act, 1872. As such, the enforceability of MoU can be divided into three main categories:

• General
• International MoU
• MoU between countries

General

In general cases, the enforceability of an MoU can be divided into two categories:

• When it fulfils the conditions of a Contract as per the Indian Contract Act, 1872.
  If the MoU fulfills the conditions mentioned under Section 10 of the Indian Contract Act, 1872, the performance of such obligations stated in the MoU can be enforced vide the Specific Relief Act, 1963.

Note: Such a relief shall only be granted under the Specific Relief Act, 1963, when the damage caused to the aggrieved party by the way of nonperformance of obligation cannot be ascertained and compensation for the damages fails to become an appropriate remedy. Sen Mukherjee and Co vs. Chhaya Banarjee [AIR 1998 CAL 252]

• When it does not fulfil the conditions of a Contract as per the Indian Contract Act, 1872. At times, the Court may find that the MoU does not meet certain requirements that establish a valid contract and, thus, they cannot be enforced. However, even in such situations, an individual has the right to approach the Court based on the Principles of Promissory Estoppel & Equity.

Note: An MoU can be held enforceable merely on the grounds of equity and based on the general principles of equity, irrespective of whatever deficiency it holds, it is still held to a be contract. Subimalchandra Chatterji vs. Radhanath Ray [AIR 1934 CAL 235]

International MoU

• All International MoUs are executed as a treaty or a covenant that is then registered under the United Nations Treaty Collection.
• All International MoU must be registered, which, in turn, would help avoid political diplomacy and secrecy.
• The enforceability of a National or International MoU is not different. The enforceability, in both cases, relies upon the intention so conveyed through the construction of such an MoU.
• The title of International MoU nowhere states whether it is a binding or non-binding document.
• It is advisable to note that on 1 July 1994 [Qatar vs. Bahrain], The International Court of Justice had stated their views upon the legality of MoU and defined various standards to maintain the legality of such MoU.

International MoU between Countries

As mentioned before, no MoU is legally binding without the clear intention of making it binding. Irrespective of that, there are certain MoUs that are signed between countries for various reasons. An MoU may be signed between two countries for:

• Exchanging resources between themselves.
• Exchanging technology between themselves.
• Student Exchange programs.
• Exchange of technical support.
• Military support.
• Understanding of peace.
• Understanding of trade.
• Understanding of allies, etc.

Every MoU must not be formally drafted and executed. However, all MoUs that have been formally drafted and executed must be registered and include the exchange of certain monetary value within the same.

Some Landmark Judgements

A few landmark judgements that have proven to be useful in deeming the legality or non-legality of an MoU are mentioned below.

Case Laws where MoU has been declared as ‘Legally Binding Document’:

• Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh
• Brikram Kishore Parida vs. Penudhar Jena
• Structural Waterproofing & Ors. v. Mr. Amit Gupta
• M/s. Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag
• Kollipara Sriramulu vs. T. Aswathanarayana & Ors
• Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors.
• Millenia Realtors Private Limited v. SJR Infrastructure Private Limited

Case Laws where MoU has not been declared as ‘Legally Binding Document’:

• Monnet Ispat and Energy Ltd. Vs. Union of India and Ors.
• Jyoti Brothers vs. Shree Durga Mining Co.

Steps to Draft an MoU

The following steps are involved in drafting an MoU:

• Topic and Title: Choose an appropriate title for your MoU, that should reflect the type of MoU you are using.
• Parties Involved: Essential details of the parties involved must be mentioned at the very beginning.
• Agreement Initiation: The tentative date on which the work will begin must be stated when drafting an MoU.
• Termination Details: Terms under which the MoU may be terminated must be mentioned in the draft. If it is a one-time contract with a fixed deadline, the date when the contract shall be terminated must be mentioned.
• Goals and Responsibilities: The MoU must state the responsibilities, duties, deadlines, and a valid description of the entire project.
• Scope and Values: The scope and project goal and their importance must be mentioned in the MoU.
• Key Stakeholders: All key stakeholders, collaborations and partnerships must be mentioned in the MoU.
• Timeline: There needs to be specific deadlines for all deliverables of projects. It must be clearly stated to inform both parties of the same.
• Terms and Conditions: All terms and conditions that you wish to set for the agreement between the two parties must be stated in a separate statement of work.
• Signatures: All MoUs must be signed by individuals who are parties to it.

Conclusion

After learning about the details, facts and decisions mentioned above, it can be deemed that an MoU is primarily a temporary non-binding contract which may be referred to when drafting a legally binding agreement. As per this same logic, it can be understood that an agreement for an agreement is not enforceable, as any agreement that is made to sign another agreement cannot be given the legal status of an agreement.


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