Memorandum of Understanding: A Complete Guide on this Concept

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MoU is an acronym form for the memorandum of understanding, and it is also known as a Letter of Intent (LoI) in India. An MoU agreement is drafted when both the parties have mutually agreed to enter into a contract. But it is significant to note that the formalities of the said contract are yet to be negotiated. Thus, this document simply means that two parties have reached a mutual decision.

Further, it is significant to note that this document is used to gauge the intention of both the transacting parties before a contract is officially signed between them. Hence, this document is not of binding nature as it does not grant rights to either of the concerned party.

Purpose Behind Drafting Memorandum of Understanding

Once the phase of negotiation is complete among the members of the concerned parties, then the only left is a verbal agreement. Hence, the main reason behind drafting a Memorandum of Understanding (MoU) is to captures all that has been agreed mutually between parties. The following listed are the other purposes which are annexed with the concept of Memorandum of Understanding –

  1. Clarifying and elucidating the main purposes behind the concerned project for the comfort of its members
  2. The statements and the terms on which the concerned parties are negotiating over are duly noted
  3. Gather the advances that occur in each one of the statements
  4. Survey the interest of the other party to achieve the task
  5. Confirms if the said arrangement scrunches amid negotiation.

Features of Memorandum of Understanding

Following listed are the features annexed with the concept of Memorandum of Understanding –

  1. Firstly, this document must specify the name and other details of the concerned parties between whom the Memorandum of Understanding (MoU) is being signed.
  2. It should clearly stipulate the purpose and the objectives for which the said memorandum is being signed.
  3. It should also specify the plans related to the meetings between the parties. For Example - the parties are required to meet at least once in a quarter.
  4. This document should also specifically talk about the amount of capital contribution to be made by each concerned party.
  5. It should also mention the name of the person authorized to take the major financial decisions.
  6. The financial record keeping of the assignment and program being undertaken should also be maintained.
  7. The Memorandum of Understanding may also provide about the appointment of the persons who will be responsible for taking care of the day to day operations of the program. Further, the role, responsibilities, and remuneration should also be mentioned.
  8. Once the MOU is duly prepared and agreed upon by all the parties involved, it should be dated and signed by the authorized individuals representing each party or the organization.
  9. The memorandum should also talk about the duration of such agreement signed between parties, i.e., the beginning and the ending dates of the said memorandum. Moreover, it should stipulate the situations in which such a memorandum shall be deemed terminated.

How to Draft a Memorandum of Understanding

Memorandum of Understanding has a very distinctive drafting process. The following listed are the steps involved in the process of drafting an MOU -

  1. The first and the foremost step is to determine the wants of the parties involved and also what they are willing to negotiate on.
  2. Once the planning is duly done, the second step is all about the drafting of the initial MOU. Also, both the parties are involved in drafting their initial MOU.
  3. In the third step, guidelines are decided by both the parties involved as per their requirements. This stage is also known as the Negotiation Phase.
  4. Once the phase of negotiations is complete, a time frame for the said MOU is then established. An overall time frame from the commencement of the Memorandum of Understanding (MoU) until its expiry date is decided.
  5. The final and the last step in the process of drafting an MOU is to add privacy statements, restrictions, etc. by both the parties engaged and then sign the final drafted MOU.

The Legality of the Memorandum of Understanding

Generally, as we all know, that Memorandum of Understanding has no legal binding effect. However, if the transaction concerning the exchange of money is engaged, then it may have legal implications on the parties concerned. In order to be legally binding, the said MOUs must include the following listed -

  1. All the parties engaged in the memorandum must be listed by their legal name, business, and address.
  2. MOU should recognize itself as an MOU and not as a contract.
  3. For an MOU to be legally binding, it should clearly identify the purpose of the agreement. Moreover, a separate section of the intentions and goals of each party should be listed.
  4. The financial obligations and responsibility of both parties should be decided.
  5. Finally, all the parties engaged should sign the MOU.

What should all content be included in the Format of a Memorandum of Understanding?

The following listed are the content that should be included in the format of a Memorandum of understanding -

  1. Purpose of entering into an MOU.
  2. Responsibilities and duties of both the parties involved in MOU
  3. Meetings and the manner of reporting
  4. Financial and technical support
  5. Any kind of monetary consideration, if in the case involved
  6. The person who will be responsible and accountable for managing all the future operations
  7. Duration of the concerned MOU, from the beginning till it expires
  8. Confidentiality clause between both the parties involved
  9. Any sort of conditions or restrictions which may take the MOU towards the termination
  10. Indemnity Clause etc

Language to be used in Memorandum of Understanding

Language plays a crucial role as it helps in determining whether the said MOU is legally binding or not. If, in case the language used in the Memorandum of Understanding outlines the terms and conditions of the offer and is also backed by considerations, then the said MOU will function as a legally enforceable contract. However, if the said memorandum specifically and clearly mentions that “This memorandum is no way a legally enforceable contract between parties mentioned above,” then this document will not have any binding effect. Thus, the use of language plays a significant role while drafting the format of the Memorandum of Understanding.

Enforceability of the Memorandum of Understanding as per the Law

The concept of MOU (Memorandum of Understanding) is governed and regulated by the provisions of the Indian Contract Act, 1872. Also, it is significant to note that if in case all the conditions mentioned under the provisions of the Indian Contract Act are duly complied with, then the performance of the said MOU can also be enforced under the provisions of the Specific Relief Act, 1963. The relief under the provisions of the Specific Relief Act, 1963, is granted when the compensation cannot be ascertained in the monetary terms.

If, in case the conditions prescribed under the provisions of the Indian Contract Act, 1872, are not duly complied with or fulfilled, then the said MOU is not acknowledged as a legally valid contract. Further, it is significant to note that this MoU can still be enforced in the court of law based on the principles of promissory estoppels and equity.

Stamp Duty payable on the Memorandum of Understanding

Generally, no stamp duty is payable on the MOU. However, the said MoU should be duly stamped if it establishes an agreement to purchase for an immovable property worth more than Rs. 100 and also when one needs to produce it in the court.

Further, if in case the stamp duty is paid, then this document gets evidentiary value and will also be admitted as a piece of evidence in court. Hence, the document not duly stamped, will not be admitted as evidence by the Court.

The Concept of Exclusive and Non-Exclusive Memorandum of Understanding

A Memorandum of Understanding (MoU) can either be elite or non-elite or even both. Whenever an exclusive MOU is drafted, then parties concerned are kept restrained from agreeing with a similar MoU with any other entity until the tenure of the first MOU is complete. While, in the case of non-exclusive MOU, the parties concerned are allowed to enter into another similar MoU with any other entity.

If, in the case, one is uneasy that the rivals may likewise approach the other party and may commence transactions with them, then in this said case, he or she can go for the option of MoU on a chosen premise with another party. Entering into an MoU means that, till the tenure of Memorandum of Understanding, the other concerned party is being prohibited from consulting with some other entity.

Performa of the Memorandum of Understanding

Memorandum of Understanding

between

(Partner)

and

(Partner)

This Memorandum of Understanding (“MOU” or “Agreement”) sets the terms, conditions. and understanding between (partner’s name) and (partner’s name) to (description of activity).

  1. Background -

(General description of the said Agreement)

  1. Purpose -

This MOU will (purpose or the goals of partnership)

The above goals will be achieved by undertaking the following listed activities -

(List and describe all the activities that are planned for the said partnership and also specify who will do what)

  1. Contact Information -

Partner name -

Partner’s representative -

Position -

Address -

Telephone -

Fax -

E-mail -

 

Partner name -

Partner’s representative -

Position -

Address -

Telephone -

Fax -

E-mail -

  1. Roles and Responsibilities of the concerned Parties -

(Describe partners’ responsibilities under this Agreement)

  1. Funding -

(Specify that this Memorandum of Understanding is not a commitment of funds)

  1. Duration -

The said MOU is at will and may be modified by the mutual consent of all the authorized officials (list partners). Further, this MOU shall become effective upon the signature by all the authorized officials from the (list partners) and will remain in force until further modified or terminated by anyone of the said partners by mutual consent. In the absence of the mutual agreement by the authorized officials from (list partners), this concerned MOU shall end on (end date of the said partnership).

 

________________________

Partner name -

Organization -

Position -

Date -

 

________________________

Partner name -

Organization -

Position -

Date -

How a Memorandum of Understanding is Distinct from an Agreement

BASIS FOR COMPARISON

AGREEMENT

MEMORANDUM OF UNDERSTANDING (MoU)

Meaning

An agreement is a document in which two parties mutually agree upon working together to attain a common objective.

A Memorandum of Understanding or an MoU is a legal document that specifies the terms and conditions of an arrangement between the two or more parties making a bilateral or multilateral agreement.

Elements

Offer and Acceptance.

Offer, Acceptance, Intention, and Consideration.

Enforceability

An agreement can be made enforceable in the court of law.

A Memorandum of Understanding or an MoU cannot be made enforceable in the court of law unless the same is duly stamped

Binding nature

It is always binding on the parties to the agreement.

It is binding upon the concerned parties only if the memorandum is engaged in the transaction dealing with the exchange of monetary consideration.

Collateral Rights

Yes

No

Form

Oral or Written

Written

 

Conclusion

MOUs play a crucial role in the business world as it helps in duly noting down all the statements and the terms on which the concerned parties are negotiating. Further, MOUs normally do not involve transactions dealing with the exchange of money. Generally, MOUs do not have any legal binding force. However, if there is a transaction involving the exchange of money, then MoU is considered as a legally binding contract.