Memorandum of Understanding (MOU) is a type of agreement which is executed between two or more parties describing the rights and obligations of the parties. Generally it is executed for initial discussions. Hence it consist the features of oral discussion among the parties.
Memorandum of Understanding is a non binding contract which reflects the intention of the parties involved in an agreement. It is also known as letter of intent in India.
Here are the following features of Memorandum of Understanding:
- A very simplified document which consist the initial discussions between the parties involved in an agreement.
- Clauses regarding common understanding among the parties.
- Base to make a formal contract later on.
Now let’s understand the major components of Memorandum of Understanding.
- Parties Identification
Description of the parties involved in Memorandum of understanding.
- Purpose/ Object
Clear description of the object for which agreement has been executed.
- Time Duration
Time duration of the agreement should be specified i.e starting and ending date of agreement. There should also be a provision regarding circumstances under which an agreement will get terminated.
- Meetings of the parties and Reporting
A proper plan should be there for the meeting between the parties. They can meet once in quarter.
- Financial Consideration
Capital contribution should be clearly specified in agreement. Name of the person should be clearly mentioned who is authorized to take major financial decisions. Proper record keeping should be maintained.
- Proper Management
Under MOU, roles, responsibilities and remuneration should be clearly mentioned. A person may be appointed for day to day operations.
After preparation of MOU, it is signed and dated by the parties.
Memorandum of Understanding consist the provisions regarding understanding between the parties in respect of particular project which they would like to undertake. We cannot conclude that mere existence of a document for understanding between the parties is a contract.
Every agreement is not a contract according to Indian Contract Act 1872. Agreements which are enforceable by the court of law are contracts.
Now the question is whether the MOUs are legally binding in India?
The essential requirements of a contract haven been specified under section 10 of Indian contract act 1982.
- There must be an existence of offer and acceptance.
- There must be a consent of the parties which is not affected by fraud, coercion, or undue influence.
- Parties involved in agreement must be competent to enter into a contract.
They must be older than 18 years old, sound mind, and not insolvent/bankrupt.
- There must be a proper lawful consideration and lawful object and intention to create legal relations.
In India, MOU fulfill the above mentioned requirements however in case intention is not present to create legal relation then it will not be considered as contract.
Contents of the MOU describe the intention of the parties involved. Rights, duties and obligations created among the parties explain the legal nature of a MOU. Therefore the most important element is to understand the nature of relationship created among the parties involved under the legally binding MOU.
Intention of the parties must be clearly distinguished on the basis of complete contract & informal agreement such as if the agreement is executed merely to agree then it is an informal agreement or it is a contract if the parties are bind to perform.