In my previous blogs, I have explained about MOU [better known as MEMORANDUM OF UNDERSTANDING] and how does it work. Also, that a Memorandum of Understanding or “MOU” is used at a variety of places starting from business, divorce, partnership firms, companies, familial relationships, government organisations, between Foreign and Indian Nationals etc.
It is the general notion that a “MOU” is non biding and has got no legal validity in India. In my present blog, I shall discuss about another unanswered question which have had contrasting views and try to discuss each aspect and then conclude and comment upon the validity of “MOU” in India.
The basic stressing areas shall include the following
1. Introduction to the validity of “MOU”
2. Legal position of “MOU” in Indian Law
3. Enforceability of “MOU”
a. In General
b. International “MOU”
c. “MOU” between two countries
4. Landmark Judgments
5. Personal Opinion
INTRODUCTION TO THE VALIDITY OF “MOU”
A “MOU” is generally said to be a ‘non-binding agreement’ which does not have any legal enforceability and thus acts merely as a ‘letter of intent’ between two parties who mutually agree or disagree to do or not to something and on the basis of which another legally binding instrument is executed keeping all the previous understandings outlined in such “MOU” and giving it effect.
As such we can decipher two things
1. A “MOU” is merely a statement of understanding between two or more parties which when made has no enforceability in the eyes of law as such an agreement has no intention to create a legal bond between such persons. As a result of which, if in case there is a breach of such “MOU” there is no relief.
2. It is a well-established rule of law that – “All contracts are agreements but, all agreements are not contracts”. This is so because for a contract to be valid it needs to fulfil all the essential ingredients mentioned u/s 10 of The Indian Contract Act, 1872. One of which is – “an intention to create legal relationship between the parties to such contract”. However, now the question arises that what if
A “MOU” is drafted in such a manner that is fulfills all the ingredients of section 10???
Can such a “MOU” be a valid contract and be legally enforceable in a court of law???
Can such a “MOU” compel the other person to oblige to the same and the breach of such “MOU” will be treated similar to that of a breach of contract???
It is also true that ‘Nomenclature’ of a contract or an agreement is not an index to determine the validity or invalidity of the same. Stating an agreement to be a “MOU” does not explicitly denote that such contract is non-binding.
LEGAL POSITION OF “MOU” IN INDIAN LAW
As mentioned above, now that we can understand the fact that it is not necessary for a “MOU” to be non-binding. The question of whether such a “MOU” is legally binding or not depends upon the intent of the parties to create a legal relationship to that extent.
Therefore, we can say that the legal position of “MOU” in Indian Law depends upon the intent by which such a document is made and thus such an intention of creating a legal relationship by way of such a “MOU” plays a pivotal role in determining the legal position of the same.
Also, it must be noted that the construction of such “MOU” holds primary importance in setting the legality and the construction of words play a pivotal role in the same.
If the parties intend to create a legal binding effect to a “MOU” then,
a. The construction of the words shall be of such nature
ü Use of the word ‘shall’ instead of ‘may’
ü ‘would be’ instead of ‘can be’
ü ‘should be’ instead of ‘might be’
So, on and so forth. The use of such words tries to create a legal relationship by making the other person liable to do a certain act. The words shall, would, should, instead of may, can, might are of a superior nature and bind the acts which follow after such words.
b. “legal binding clause”
ü A “MOU” would be legally binding if the parties thereto agree to insert any such clause, the literal meaning upon reading of which would mean that such a “MOU” intends to create a legal relationship between the parties to the contract and that the breach of such provisions would mean the same as a breach of a contract under the Indian Contract Act, 1872.
c. In consistency with section 10 of the Indian Contract Act, 1872
ü If a “MOU” fulfills all the conditions laid down u/s 10 of the Indian Contract Act, 1872 then, such a “MOU” should be treated as a contract as defined in section 2(h) of The Indian Contract Act, 1872. Hence, giving it a legal force.
d. Insertion of a “dispute resolution clause”
ü If a “MOU” inserts a dispute resolution clause, then, it binds the parties to perform their obligations as mentioned or specified in such “MOU”. Non performance of which will lead to breach/dispute for which the “MOU” in itself shall contain a clause which shall provide the method in which such dispute shall be resolved in good faith and in an amicable manner.
Thus, from the above we can say that – The principle legislation governing “MOU” in India is dealt with the Indian Contract Act, 1872.
Also, in order to make a “MOU” legally enforceable it must have a clear intention to bind the parties to a contract whereby both come under specific obligation to perform their part of the duties.
ENFORCEABILITY OF “MOU”
As has been discussed earlier in this blog, the enforceability of a “MOU” depends upon the principle governing legislation. I.e. The Indian Contract Act, 1872. In light of this, the enforceability of “MOU” can be divided into 3 categories.
a. In General
b. International “MOU”
c. “MOU” between two countries
In the general sense, the enforceability of a “MOU” can be divided into two categories. They are:
1. When it fulfills the conditions of a Contract as per The Indian Contract Act, 1872.
ü If the “MOU” satisfies the conditions laid down u/s 10 of The Indian Contract Act, 1872 then, the performance of such obligations laid down in the “MOU” can be enforced vide The Specific Relief Act, 1963.
ü However, such a relief shall only be granted under The Specific Relief Act, 1963 when, the damage caused to the aggrieved party by way of non-performance of obligation cannot be ascertained and compensation for in lieu of such damages fails to become an appropriate remedy.
Sen Mukherjee and Co vs. Chhaya Banarjee
[AIR 1998 / CAL 252]
2. When it does not fulfill the conditions of a Contract as per The Indian Contract Act, 1872.
ü In certain cases, the courts may find that the “MOU” lacks certain requirements to form a valid Contracts and hence the same cannot be enforced.
ü However, even in the above circumstance a person has the right to approach to the court on the basis of:
Ø Principles of promissory estoppel &
Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh
[AIR 1979, SC 621]
ü Even beyond that, a “MOU” can be held as enforceable merely on the grounds of equity and on the basis of the general principles of equity irrespective of whatever deficiency it holds is still held to be a contract.
Subimalchandra Chatterji vs. Radhanath Ray
[AIR 1934, CAL 235]
ü Any International “MOU” is executed in the form of a treaty or a covenant which is then registered under the ‘United Nations Treaty Collection’.
ü These International “MOU” should be registered and by doing so one avoids political diplomacy and secrecy.
ü The enforceability of a National or International “MOU” does not differ. In both the cases, the enforceability is dependent upon the intention so conveyed through the construction of such “MOU”
ü The title of such International “MOU” nowhere mentions whether it is a legally binding document or whether it is non-binding document.
It is prudent to mention here that, The International Court of Justice in the year 1994, July 1st [Quatar vs. Bahrain] has expressed their views upon the legality of “MOU” and had also provided various standards to be maintained for the legality of such “MOU”
INTERNATIONAL “MOU” BETWEEN COUNTRIES
ü As it has already been mentioned and is clear now that no “MOU” is legally binding without the clear intention of it making it as binding.
ü Nevertheless, there are “MOU” between countries for a variety of reasons and some of them can be as follows. The “MOU” entered between two countries can have the object and purpose of: -
1. Exchanging resources between themselves
2. Exchanging technology between themselves
3. Student exchange programs
4. Exchange of technical support
5. Military Support
6. Understanding of peace
7. Understanding of trade
8. Understanding of allies ETC
ü The above list though not exhaustive, mentions some of the reasons why two countries enter into a “MOU” and act accordingly.
ü Also, every “MOU” must not be formally designed and executed, but those which have been formally designed and executed must be registered and include the exchange of some monetary value with the same.
Given below are a list of landmark judgments which have been held to be useful in deciding the legality or non-legality of “MOU”
CASE LAWS WHERE “MOU” HAS BEEN DECLARED AS A LEGALLY BINDING DOCUMENT
1. BrikramKishore Parida v. Penudhar Jena
2. Structural Waterproofing & Ors. v. Mr. Amit Gupta
3. Jai Beverages Pvt. Ltd. v. State of Jammu and Kashmir and Ors
4. Millenia Realtors Private Limited v. SJR Infrastructure Private Limited
5. Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh
6. M/s. Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag
7. Kollipara Sriramulu vs. T. Aswathanarayana &Ors
CASE LAWS WHERE “MOU” HAS NOT BEEN DECLARED AS A LEGALLY BINDING DOCUMENT
1. Monnet Ispat and Energy Ltd. v. Union of India and Ors
2. Jyoti Brothers v. Shree Durga Mining Co
After going through all the above details, facts, and decisions one can conclusively conclude that a “MOU” is generally a non-binding agreement made for the purpose of making another agreement which shall rely upon the principles of such “MOU” and then carter them into a legally binding agreement.
Going by the same logic it is stated by the courts that any agreement which is made for the purpose of making another agreement cannot be given the legal status of an agreement. So, to say, an agreement for an agreement is not enforceable.
However, now the question arises that – if a “MOU” which is said to be an agreement on the basis of which another agreement is made which then becomes a contract and the breach of such contract shall be legally bending but not a “MOU”. Then, would it be right to say that
1. A pre-mortgage agreement
2. A pre-sale agreement
3. A pre-lease agreement ETC
Or, any such agreement which has the same purpose that which of a “MOU” merely having different names as mentioned above shall also come under the same purview and shall not be legally binding?
To which I can deduce the following: -
1. Mere heading of any agreement shall not be used as an index to come to the decision of its legality or illegality. The contents of the same shall hold value and the agreement in full shall be taken into consideration with respect to equity and principles of promissory estoppel.
2. The construction and use of words in such agreement shall also be taken into consideration which will further help the reader to analyse the same and conclude whether such agreement was made with an intention to comply with or was it made just for namesake and was merely a promise.
3. Insertion of various clauses like “legal binding” “indemnification” “damage” “breach” which shall show the clear intention to make such agreement legally binding would play a pivotal role.
4. A “MOU” is said to be an agreement which needs to fulfil the valid requisites of a contract u/s 10 of The Indian Contract Act, 1872 as it is the guiding principle legislation. Hence it can be said that if any agreement [irrespective of its nomenclature] fulfils the conditions as laid down u/s 10 of such act shall be deemed to be legal and enforceable.
From the above we can finally come to the conclusion that: -
1. Any agreement to be a contract shall fulfil the provisions of section 10 of The Indian Contract Act, 1872.
2. An agreement may or may not be legally binding depending upon the intention between the parties who enter into a contract.
3. In its generic definition a “MOU” is defined to be a non-binding document, however, if there lies a clear intention of compliance then such “MOU” shall be binding.
4. It is a well-established rule of law that if a “MOU” fulfils all the conditions laid down u/s 10 of The Indian Contract Act, 1872 then, such a “MOU” shall be legally binding.
5. Apart from everything a “MOU” can be enforceable in spite of deficiencies on the grounds of equity and promissory estoppel as held in the case of
Subimalchandra Chatterji vs. Radhanath Ray [AIR 1934, CAL 235].
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