MOUs becomes legally binding when the intention of the parties to enter
into a definitive agreement/contract reflects apparent on the face thereby
letting know that they intend to create a legal relationship between them.
The Supreme Court, in the case of Orissa & Others v. Titaghur Paper
Mills Company Ltd. & Another
held that "a Memorandum of
Understanding embodies the understanding of parties with respect to a particular
transaction or a project which they wish to undertake. However, the mere
existence of a document with respect to an understanding reached between the
parties does not necessarily lead to the conclusion that such document is a
In the instant case the intention of the parties can be can be deduced
clearly. At the time of entering into the MOU, the formation of a definitive
agreement was subject to the awarding of tender to ABC PVT LTD.
Furthermore the MOU did not lay out the specific roles and
responsibilities of the parties. A mere arrangement was put in and that
too subject to the fulfilment of some other happening.
The Supreme Court in Jyoti Brothers v. Shree Durga Mining Co.
1956 Cal. 280, held 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 based
on the fact whether either of them acted in reliance on such Understanding".
For the sake convenience if we substitute the word "MOU" instead of
Contract in the light of the first line mentioned by the Supreme Court,
mere entering into a an MOU can't be considered to be a valid contract.
Even if the court relies upon the degree of importance understanding, the
words clearly in the MOU explicitly tell us the non-existence of the
intention to create a definitive agreement.
"Nothing in this Agreement shall
constitute, create or give effect or recognize any Joint Venture (JV), partnership
or business entity of neither any kind nor any legal claim on each other".
The MOU apparently contains the above mentioned clause which says creation of the MOU does not result in any joint venture, partnership etc.
Existence of the said clause would speak about
the formation of a full-fledged contract/agreement. Only subject to the
happening of another event, the contract along with obligations and
rights would come into picture.
In Royal Orchids vs. Kulbir Singh Kohli &
it was held by the Delhi High Court that "memorandum of
understanding (MOU) in a commercial transaction between private parties is
determinable by nature. Therefore, the court held that such a contract can be
terminated in the absence of a termination clause and the said MOU was not
capable of specific performance".