How Long A Memorandum of Understanding (MOU) is Valid?

The most intriguing subjects for any law student, perhaps would be the Interpretation of Statutes. Statutory interpretation is the process by which the courts interpret and apply laws to the facts placed before it in any case. Words can mean differently under various circumstances, hence it becomes extremely important to interpret the underlying intention of the legislation. Greater emphasize is to be laid upon the purpose for which any law has been enacted and not just the literal meaning of the words which are used to frame the legislation.  On such occasions when the literal meaning of the words express the true intent of the law, then it becomes easier for the courts to apply the same to the facts of the case.

Akin to the instances when the Judge advices an advocate in the midst of a cross examination, to limit his/her questions only related to the facts of the case; Am sure, by now you must be wondering why are we taking this walk down the memory lane of the fundamentals of Interpretation of Statutes, where as ideally we were to decipher the validity of a MOU, (Memorandum of Understanding); in this article. Well, in all my humbleness, I’d like to reassure that the correlation will transpire soon enough, so kindly stay with me.

Going ahead with the interpretation of words, the legendary jurist Sir John William Salmond had stated that  “The essence of law lies in the spirit, not in its letter, for the letter is significant only as being the external manifestation of the intention that underlies it ”

Precisely, how the intent of the words with which a MOU is drafted defines its very definition and further its validity in the eyes of the law.  “What’s in a name, a rose by any other name would smell as sweet? ”  is a popular reference to William Shakespeare’s play Romeo and Juliet. Exactly how naming an agreement or a contract as a MOU wont effect its enforceability in law. If a document per se, titled as 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 enforceability. Now that we have arrived at the conflux of the Interpretation and MOU, it’s time to plunge into the essence of it. First things first, let’s get to understand the definition;

MOU – Memorandum of Understanding:

A memorandum of understanding ( MOU ) is an agreement between two or more parties drafted in a formal document which sets forth their understanding about a future engagement amongst them. Though it is generally not legally binding, but it implies the intention of an impending contract in future. A MOU is at best a guiding document for the development of future binding contract. It however plays an important role by allowing the parties involved to devise and formulate the clauses of the intended binding agreements. It is possibly one of the widely used documents in world of commerce and economics, yet the most misunderstood.

With the aforesaid, we can now understand that the MOU can be termed as an commencement of negotiations, as it defines the scope and purpose of the intended binding agreement, as business parties use MOUs to set forth their understanding and expectations with regard to the specific performances of either parties in the contemplated agreement.

Validity of a MOU:

Generally speaking an MOU is a non binding agreement, which sans legal enforceability and thus we can understand it as a “Letter of Intent” between two or more parties intending to enter into a contract at a later stage. If I may, for a moment, draw your attention to the essentials of a valid contract, one of the key essentials is the intention of the parties to create a legal relation. Since in a MOU, there isn’t any intention of either of the parties to enter into a legal relation; the enforceability cannot be desired principally. As held by a bench of Supreme Court in Monnet Ispat and Energy Ltd. v. Union of India and Ors., that MOUs are not a contract and hence neither binding nor enforceable.

However, the buck doesn’t stop there and there’s more to it, which brings us to the little detour we took in the beginning of this article, the Interpretation. As stated earlier, it’s the intent and not mere words which establishes the document’s absolute meaning, consequently its enforceability in law.

The fundamental law governing the contracts – All contracts are agreements but, all agreements are not contracts, establishes the basic principles of a legally valid contract; that it needs to fulfill all the essential ingredients mentioned U/s 10 of The Indian Contract Act, 1872. Therefore any MOU which is drafted in such a manner that fulfills all the ingredients of section 10, then it becomes a valid contract enforceable by law, immaterial of the fact that the said document was titled as a MOU.  As precisely held by the High Court of Delhi in the Nanak Builders And investors Pvt. Ltd. vs.  Vinod Kumar Ala.,  – “…. 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 ”

Therefore, if an agreement is to fulfill the essentials of a contract, it shall be dealt as per the provisions as laid under the The Indian Contract Act, 1872 and the The Specific Relief Act, 1963.

Besides, the principle legislation governing MOUs in India  is the Indian Contract Act, 1872. For example if a MOU comprises a clause for a dispute resolution, then it shall bind the parties to perform their obligations as specified therein. Non performance of which will lead to a breach/dispute for which the MOU in itself may have a clause which shall provide the manner in which such a dispute shall be resolved in good faith and in an amicable manner.

Therefore, How long is an MOU valid?

The Memorandum of Understanding (MOU) is expected to comprise adequate clauses to set forth its validity, ideally an MOU is valid as long as the purpose agreed therein are not achieved, once the purpose of its existence are met with, the MOU ceases to exist.  Generally speaking, since MOU is an agreement to arrive to an agreement, such terms and conditions to enter into a valid contract thereupon. Hence, once such terms and conditions are negotiated and agreed upon and the parties enter into the desired contract, the MOU ceases to exist.  Therefore a MOU is valid only so far as its desired intentions are accomplished, or legally speaking it is valid only at the intentions of the parties involved therein, since a MOU is not legally binding in nature, should either or all the parties to it opt to not act upon, the MOU loses its validity. At best its Voidable in nature, at the desire of either of the parties to the document.

This blog post is written by Vijay Surana M, student of LLM 1st year at SV University, Tirupati. 

Also Read – Contract Of Indemnity And Contract Of Guarantee

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