A Memorandum of Understanding (MoU), also known as the Letter of Intent (LoI), is a document that describes a formal agreement between two parties. It is a non-committal written statement detailing the preliminary understanding of the parties who intend to enter into a contract at a future date. The sole purpose of entering into a MoU is to record the consensus of the parties to enter into a contract in the future. The parties, through a MoU, generally do not intend to raise an obligation or create an obligation on either party. It is not a legal agreement but it helps in indicating the establishment of a business relationship that will continue and likely result in a legal agreement such as a contract in the near future. In other words, a MoU can be termed as an “agreement to agree”. The general practice is that a MoU is put in place when the parties have agreed to enter into a contract but are yet to complete the formalities of a contract and negotiate the terms of the contract in detail.
Legal position of MoUs under Indian Law:
Indian Contract Act, 1872 is the principle legislation governing contracts under the Indian law.
According to Section 10 of the Act, agreements made by parties, competent to contract under the Act, of their own free will and for a lawful consideration and object are contracts.
One can say that the fundamental characteristic of a contract is the intention of the parties to enter into a binding agreement or obligation, which results in the formation of a contract. Therefore, clauses under the MoU making provision for an enforcement mechanism in case of breach by either party will confirm that the parties did intend to enter into a binding agreement. A MoU containing preliminary terms is non-binding, unless a binding understanding between the parties can be inferred from the context.
The Indian Courts have given mixed opinions regarding the bindingness and enforceability of Memorandums of Understanding. It can be said that the enforceability and bindingness of such Memorandums depends on the intention of the parties as seen from the terms of the agreement.
In Jyoti Brothers v. Shree Durga Mining Co. [AIR 1956 Cal. 280], the Calcutta High Court laid down that a contract to enter into a contract is not considered to be a valid contract in law at all. However, the same is not conclusive. The court will rely upon the degree of importance of such understanding to the parties and to the fact that whether any of them has acted in reliance on such Understanding.
In the case of Kollipara Sriramulu v. T. Aswathanarayana and Ors. [AIR 1968 SC 1028], even though the Supreme Court was dealing with an oral agreement entered into before a final contract was executed, it was held that “a mere reference to a future formal contract will not prevent a binding bargain between the parties. The fact that the parties refer to the preparation of an agreement by which the terms agreed upon are to be put in a more formal shape does not prevent the existence of a binding contract.”
In Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors. [2006 (4) SCJ 401], the Supreme Court has held that if the conditions to the MoU are otherwise acted upon, the parties to the MoU will get the benefit arising out of the MoU.
In the case of Monnet Ispat and Energy Ltd. v. Union of India and Ors. [(2012) 7 SCR 644], 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 the case of M/s. Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag [AIR 1991 Del 315], the Delhi High Court held that where the essential substantial terms have been agreed upon and reduced into writing, and the agreement so entered into does not mention that another formal agreement will be executed, the Court would not consider the agreement as an incomplete agreement. It was further stated by the Court that the mere heading or title of the document would not decide its legality. The legality will depend on the nature and contents of the agreement.
In Structural Waterproofing & Ors. v. Mr. Amit Gupta & Ors. [2001 (93) DLT 496], the Delhi High Court held that in the absence of proof of coercion or misrepresentation, the MoU which is otherwise valid should be implemented and parties thereto are bound by the terms and conditions of the MoU.
In Millenia Realtors Private Limited v. SJR Infrastructure (Private) Limited [2005 (6) KarLJ 36], the Karnataka High Court held that Memorandums of Understanding (MoUs) are not to be construed as contingent contracts and are capable of enforcement.
Enforceability of MoUs:
As evident from the various landmark judgments mentioned above, if the intention of the parties to create a binding agreement is evident from the contents of the MoU, then in that case, the MoU shall be enforceable in a Court of law. Enforceability of a MoU will depend on two situations:
- Where the MoU fulfills the conditions of a contract under the Indian Contract Act, 1872:
Where the MoU satisfies the criterions for a contract under the Act, the performance can be enforced under the Specific Relief Act, 1963. The enforcement under the Act is by way of specific performance of whole or part of the MoU. Under Section 10 of the Act, specific relief will only be granted where the extent of damage due to non-performance cannot be ascertained, or where compensation in monetary terms cannot provide sufficient relief to the aggrieved party.
Usually the obligations conferred under a MoU are in the nature of execution of a contract in the future, or to collaborate in a business venture prospectively. The opportunity lost due to noncompliance can, obviously, not be compensated in monetary terms. It was held in the case of Sen Mukherjee & Co. v. Chhaya Banarjee [AIR 1998 Cal 252] that it is the prerogative of the party aggrieved to apply for specific performance, and the discretion of the Courts to grant such an application.
- Where the MoU does not fulfill the conditions of a contract under the Indian Contract Act, 1872:
In certain cases, the Court may hold that the MoU is not a valid contract based on the contents of the MoU. In such cases, the party seeking enforceability of the contract can approach the Court based on the principles of promissory estoppels and equity.
The principle of promissory estoppel was settled by the Hon’ble Supreme Court in its landmark decision in Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh [AIR 1979 SC 621], wherein it opined that the doctrine of promissory estoppel is a principle evolved by equity to avoid injustice where a promise is 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.
Further, a MoU is enforceable on the general principles of equity. The Calcutta High Court, in the case of Subimalchandra Chatterji v. Radhanath Ray [AIR 1934 Cal. 235] held that equity holds people bound by a contract, which though deficient in some requirement as to form, is nevertheless an existing contract.
The enforceability of the MoU depends upon the intention and negotiations between the parties as reflected in the terms of the MoU. The legality and enforceability of a MoU will change depending on the contents and nature of the agreement entered into by the parties.
Whether a MoU is binding or not is a question which is subject to adjudication by the Courts. As seen above, the MoU will be binding if it fulfills the conditions of a valid contract, i.e. presence of valid offer, acceptance, intention of the parties to be legally bound and consideration or where a party has acted upon an MoU. One of the main factors to be taken into consideration while deciding its enforceability will be the intention of the parties while executing of the Memorandum which will be interpreted from the terms of the Memorandum and its conduct post the execution of the Memorandum.
Therefore, it is pertinent for the parties to exercise caution while drafting the language, titles and clauses of the Memorandum of Understanding. It is necessary that clauses such as jurisdiction clause, governing law clause, indemnification have binding effects to the agreement and survive the MoU. Likewise, the use of the word “shall” would give a binding effect to the MoU and use of the words “should” or “may” a non-binding effect.
Author: Gursimran Kohli, BBA LL.B – V Year, Intern at Kaden Boriss, India
Symbiosis Law School, NOIDA
New Delhi, India