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An estimated 2-minute read

Enforceability of a Memorandum of Understanding

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A Memorandum Of Understanding (‘MOU’) is generally a preliminary understanding between the parties to a contract, prior to the execution of a formal agreement. It is a document highlighting the intention of the contracting parties and might also be known as a Letter of Intent (‘LoI’). MOU is generally executed for creating consensus between the contracting parties for future contracts and is usually not intended to have created any obligations upon the parties. Primarily, what must be understood is that a MOU is non-binding and legally non-enforceable and is only an “agreement to agree” and highlights business relationship, which, are likely to result in some contract or any formal agreement between the parties. However, a MOU may create an obligation upon the parties if a binding understanding is inferred from the clauses of the MOU.

Several judgments have been pronounced by various courts of India on the validity and enforceability of a MOU. Calcutta High court held that ‘a contract to enter in a contract is bad and not valid from the point of view of law[1]. However, 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 another contradicting judgment, the Supreme Court has held that, ‘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[2]. The Supreme Court also 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[3].

A MOU does not have to be necessarily titled as a ‘Memorandum of Understanding’. The nature of the document is not decided on the heading but on the content that is written. Mere heading or title of a document cannot deprive the document of its real nature[4].

In light of the above, it can be concluded that the enforceability and binding nature of a MOU depends upon the content, nature of agreement, language and intention of the parties to it. In cases wherein the MOU is in the nature of a contract and fulfills its essentials, it is held to be enforceable. A major factor to decide whether a MOU would be binding is the intention of parties while executing the MOU and their conduct post execution.

[1]Jyoti Brothers vs. Shree Durga Mining Co. [AIR 1956 Cal 280]

[2]Kollipara Sriramulu vs. T. Aswathanarayana &Ors [1968 AIR 1028]

[3]Jai Beverages Pvt. Ltd. vs. State of Jammu & Kashmir And Others [2006 (4) SCJ]

[4]Nanak Builders And investors Pvt. Ltd. vs.  Vinod Kumar Alag [AIR 1991 Del 315]

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