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The Legal Validity of MOU In India

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
6. Conclusion

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
# Use of the word ‘shall’ instead of ‘may’
# ‘would be’ instead of ‘can be’
# ‘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
# 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
# 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
# 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 General
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.
# 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.

# 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.
# 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.
# However, even in the above circumstance a person has the right to approach to the court on the basis of:
# Principles of promissory estoppel &
# Equity
Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh [AIR 1979, SC 621]

# 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]

International MOU
# Any International MOU is executed in the form of a treaty or a covenant which is then registered under the ‘United Nations Treaty Collection’.

# These International MOU should be registered and by doing so one avoids political diplomacy and secrecy.

# 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

# 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

# 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.

# 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

# The above list though not exhaustive, mentions some of the reasons why two countries enter into a MOU and act accordingly.
# 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.

Landmark Judgments
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. Brikram Kishore 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

Personal Opinion
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]. Content Reference from Legal Blog  

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