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Legal Nature of MoU
Legal Nature of MoU
AND DRAFTING
(First published in All India Reporter)
In present day business parlance, Memorandum of Understanding (MOU) as this
term is being used, it has become the most misunderstood term. It is used for relationship
varying and oscillating in between non binding to binding nature. However, from legal point
of view the term Memorandum of Understanding"(MOU) should only be used to depict
and embody the understanding of the parties in principle without creating any right or
obligation of binding nature. In essence, MOU is a simple and pure gentlemen's agreement
which does not create any right or duty of binding nature to be enforceable by a Court of
law.
It is generally observed that after meeting of Heads of States, announcement of their
agreement in principle to cooperate in different fields is made and this understanding is
reduced in writing in the form of MOU providing that respective Government departments
will further discuss, deliberate and enter into detailed contracts later on.
Similarly, when parties are carrying on negotiations and they feel that for further
evolution and concretization of ideas detailed deliberations are required so as to reach
acceptable bargain maturing into contract and enough time is available, they execute a
document outlining the underlying agreement in principle to cooperate and to further
negotiate and finalize the contract. Such a document may be in the form of MOU.
Therefore, mere existence of a document with respect to understanding reached
between the parties does not necessarily lead to the conclusion that such document is a
contract. A distinction is drawn between, on the one hand, documents which are only
informal memoranda, and, on the other, those which are intended as complete contract
document, i.e. exhaustive records of the terms finally agreed to which parties consider
themselves bound. (Vide Treitel G.H., An Outline of the Law of Contract, Vth Ed.
Butterworths P.75).
In Milner V. Percy Bilton [(1966) 2 All E.R. 894], the term "understanding" was
held to mean "some thing quite different from a binding legal contract; at utmost the word
connotes a gentleman's agreement".
Very similar to the concept of MOU is letter of comfort. Its issuance and use is a
modern development which is meant for assurance and encouragement of a party generally
by a Government but it falls short of guarantee. It is well settled principle that the true effect
of a document depends on words used in it. In Kleinwort Benson Ltd. V. Malaysian Mining
Corpn. [(1989) All E.R.785], Hirst J. held that letters described as comfort letters having
come into existence as part and parcel of a commercial banking transaction ,were to be
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presumed to be intended to create legal relations ( vide Smith &Thomas, A Case Book on
Contract, IXth Edn.Sweet & Maxwell.p.188). On the other hand in J.H.Milner & Sons v.
Percy Bilton Ltd. it was held that vagueness of language used in letters of comfort may also
lead to the conclusion that when issued in the course of commercial negotiation they do not
have contractual force.
Legal Nature
The term MOU, in practice, is used to denote relationship which may be binding or
non binding in nature. Therefore, it is necessary to probe deeper and dwell in detail so as to
understand and appreciate nature of relationship created amongst the parties by MOU.
The legal nature of M.O.U essentially rests on the nature of rights, obligation/
duties or legal relationship it creates among the parties. No doubt, it embodies understanding of the parties in principle, however all understandings do not mature in contracts
or in other words may not result in conferring of rights and imposition of duties and as such
can not be enforced by the legal process.
As per Section 10 of the Contract Act 1872, the essential requirements of a legally
binding agreement are as follows: a)
b)
c)
d)
e)
f)
There must be offer from one party and its acceptance by another,
Consent of the parties must be free,
Parties must be competent to contract,
There must be lawful consideration,
There must be lawful object.
There must be intention to create legal relations
In a pure and simple MOU, there may be offer and acceptance among competent
parties with their free consent and object may also be lawful but still no binding relationship
is created or come in to existence because when it is tested on the touchstone of above
ingredients it emerges that MOU lacks consideration and intention to create legal relationship.
Lack of Intention to Create Legal Relationship and Consideration
The intention to create legal relations may be negatived or excluded expressly in a
document or may be implied from the terms contained in it. In Rose and Frank Company
V. J.R.Cromption and Bros. Ltd [(1925) A.C 445]; Kings Bench Division [ (1923) 2
K.B.261 ], an agency agreement provided "This arrangement is not entered into, nor is this
memorandum written, as a formal or legal agreement and shall not be subject to legal
jurisdiction in law courts either in United States or England but it is only definite
expression and record of the purpose and intention of the....... parties concerned, to which
they each honorably pledge themselves with the fullest confidence ,based on past business
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with each other ,that it will be carried through by each of the three parties with mutual
loyalty and friendly cooperation".
It was held that this "honour clause" negatived contractual intention and the
agreement concluded does not give rise to legally binding relations as parties did not
intend so. In social and family relations such an intention is implied whereas in business
matters it may be expressly excluded. In business matters parties may intend to rely on
each other's good faith and honour, excluding in clear and unambiguous terms all idea of
settling of disputes by any outside intervention, Scrutton L.J. observed in Rose and frank
C. V. J.R. Crompton.
His Lordship Scrutton L.J. also considered the opinion of standard text writers and
quoted the following in his judgment:In Sir Frederick Pullock,s language (9th Edn. 1921 p.3)" an agreement to become
enforceable at law must be concerned with duties and rights which can be dealt with by a
court of justice. And it must be the intention of the parties that the matter in hand shall if
necessary, be so dealt with, or at least they must not have contrary intention . Sir William
Anson requires in contract "a common intention to affect the legal relations of the parties"
[(vide Smith 44& Thomas, A Case Book on Contract, sixth Edn. Sweet & Maxwell
186-188; also see Jones V. Vernons Pools Ltd. 44(1938) 2 All E.R; Appleson V.
Littlewood Ltd. (1939) 1 All E.R. 464; Guest V. Empire Pools (1964) 108 S.J. 98.[Para
124, page 70-71, Chitty on Contracts, 25th Edn.]
On the other hand in Home Insurance Co. v. Administration Asignrarilor de slat
[(1983) 2 Lloyed's Rep. 674], a reinsurance contract provided that "it was to be interpreted.... as an honorable engagement rather than as a legal obligation". Held that these
words affect the interpretation and not the binding character of the contract.
The statements contained in an MOU may have some affect in law, but its exact
nature depends on whether these are mere representations and understandings or in the
nature of binding terms and conditions. The difference between MOU and a contract is a
difference of should and shall i.e. in contract obligations are created by using the
word "shall" whereas in MOU parties agree that they " should" do a particular thing
reflecting their solemn desire to do so. A contract deals with agreement in reality which is to
be acted upon whereas MOU is an agreement in principle falling short of taking any
action and leaving it to the sweet will of the parties.
In the State of Orissa & Others v. Titagar Paper Mills Company Ltd. & Another
[AIR 1985 S.C.1293] the Supreme Court laid down as under:"It is true that the nomenclature and description given to a contract is not determinative of
the real nature of the document or of the transaction thereunder. These, however, have to
be determined from all the terms and clauses of the document and all the rights and results
flowing therefrom and not by picking and choosing certain clauses."
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Preamble/Recitals
Preamble of a document like MOU contains background facts which have
preceded the execution of MOU and sometimes reason and objective for its execution. The
legal importance of preamble is that it contains admitted facts which parties can not deny
later on. An illustration is given below:"WHEREAS the t Parties have experience and capabilities in the field of co-operation and
therefore the Parties desire to join their skill, experience and resources to work together
for mutual interest and benefit.
WHEREAS the Parties have enjoyed long lasting and mutually beneficial relationship.
The future holds much promise for expanded relations and cooperation. As such, the
Parties intend to explore the possibilities and opportunities that exist to further develop
their relationship.
WHEREAS the Parties desire to initiate negotiations. It is anticipated that these
negotiations will result in a long lasting business relationship and will serve as a platform
to broaden and further develop mutual cooperation.
Accordingly, the Parties desire to create a frame work on which to proceed with and to
diligently pursue the activities they mutually agree and to implement it in a manner
consistent with the terms set forth in this MOU.
Now, therefore, in recognition of agreement in
understanding as follows :-"
Alternative Provision
"NOW, THEREFORE, for and in consideration of the premises and mutual covenants set
forth herein, and for other good and valuable consideration , the Parties hereby agree as
follows:-"
The above provision is used when MOU is more in the nature of binding
agreement or certain provisions which are intended to be binding on the parties whereas
rest embodies the agreement in principle and is of non binding nature.
Definitions
The words which parties want to use in a meaning and sense different from the
generally understood or dictionary meanings, may be defined for the purpose of MOU.
The definition clause may be given at the beginning or at the end of the MOU. After a
word is defined it should be used with first alphabet in upper case in the MOU so that a
distinction is maintained between defined term and same term when used in a general
sense in the document.
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Except in accordance with the provisions of this MOU, each of the parties agrees
that it and its Affiliates or associated company shall not, directly or indirectly in any
manner whatsoever, associate individually or in combination with others, with respect to
subject matter of this MOU. The provisions of this Article shall survive the expiry or
earlier termination of MOU.
Alternative Provision
This MOU is being entered on non-exclusive basis and does not preclude the
Parties from entering into similar MOUs with other Parties. A decision is required to be
taken whether MOU is intended on exclusive or non-exclusive basis and accordingly
alternative provision is to be chosen and incorporated.
Term and Termination of MOU
This MOU shall remain in effect until the first to occur of the following events:
a)
b)
c)
Notices
Any and all correspondence made or notices to be sent or required to be made under this
MOU shall be in writing, signed by the Party giving such notice (claim or demand) and
shall be delivered personally ,or by facsimile transmission or by registered mail, to the
other Parties as its addresses set forth herein below or at such other addresses as such
other Parties may subsequently notify. All notices shall be deemed given when delivered,
which includes facsimile transmissions.
Party A
Telephone No.
Facsimile No:
Address:
Attention:
Party B
Telephone No:
Facsimile No:
Address:
Attention:
Assignment
This provision is generally not included in MOU because the relationship of the
parties is in nascent stage and except confidentiality or one or more other provisions, rest
of the provisions are not intended to be of binding nature. Furthermore, MOU does not
create any assignable interest which may be transferred. Therefore, in an MOU simplicitor,
this clause may not be included. However, an illustration is given below.
"Assignment by a Party of its rights and obligations under this MOU to any other party
shall be subject to the consent of the other Parties to the MOU."
Applicable Law
This clause is not required and provided for in MOU simpliciter but if some clauses
are intended to be of binding nature and foreign parties are involved ,it is better to
incorporate this clause so as to avoid any controversy in future.
This MOU shall be governed by and construed in accordance with the laws of
--------------- and courts at ............only shall have exclusive jurisdiction.
Dispute Settlement
"In the event of any difference (s) or dispute (s) arising out of the interpretation or
application of the provisions of this MOU, the Parties shall immediately consult each
other with the view to expeditiously resolve such differences or disputes in a spirit of mutual
understanding and cooperation."
Confidentiality
This clause is included when confidential information or data is being exchanged so
as to assess the chances of cooperation.
"No Party shall disclose any information to any third party concerning the matters under
this MOU. Any proprietary information (properly identified as such by the disclosing
Party) to be contained in reports or disclosed by one Party to the other Party, shall be kept
strictly confidential by the receiving Party, and shall not be disclosed to any third party
without the prior written consent of the original disclosing Party.
This clause shall not apply where;
a) disclosure is made to the employees , or
b) disclosure to any court, the Government or other statutory authorities or other bodies to
the extent required by law, guidelines, rules or regulations applicable to any Party,
c) required to consultants, advisers engaged by a Party,
d) information is already in public domain but not as a result of breach of this MOU,
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In the presence of
______________________________ _________________________
Name:
Name :
Address:
Address:
For and on behalf of
Party B
In the presence of
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_________________________________ __________________
Name:
Name:
Address
Address:
Therefore, MOU as understood in strict legal sense, lacks consideration as well as
intention to create legal relationship. The MOU is simply an embodiment of the solemn
desire of the parties which have developed and reached to some understanding but only in
principle without creating any obligation. Such understanding is reduced in writing for the
purpose of reference and further processing. However in ultimate analysis, a document is
classified by its contents and not by title therefore, whether a document is an MOU or a
contract shall depend on its contents and not on title. For example, a document might have
been termed and titled as MOU, but contains binding terms & conditions, it is a contract
and not MOU.
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