Memorandum of Understanding Legally Binding In India or Not?

WHAT IS MEMORANDUM OF UNDERSTANDING?

A memorandum of understanding (MOU) is moreover an explicit agreement between two or more parties, companies and organizations.

Memorandum of understanding is also known as Letter of Intent which is a document outlining the understanding between two or more parties. A Memorandum of Understanding or MOU Agreement is entered when the parties have agreed to enter into a contract, but the formalities of the contract are yet to be actualized.

Memorandum of understanding can be used as an instrument to establish a contract.

In our country, MoUs are governed under the Indian Contract Act 1872. Although the imposition of MoUs are considered under the Specific Relief Act and it is here only when the Doctrine of estoppel, plays a role for enforcement of MoU.

If the MoU does not fulfil the term and conditions of a contract under the Indian Contract Act 1872 then, the Court can regard the Memorandum of Understanding as inoperative. In the landmark case of Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh,1 the conceptualization of promissory estoppels and equity was entrenched, where it was stated that the doctrine of promissory estoppel is a precept evolved by equity to avoid any kind of injustice and so whereby a promise has been made by a person knowing that it would be carried on by the person to whom it is made, and in fact it is so acted upon, and it is unjust to let the party making the promise to retract upon it.

ENFORCEABILITY OF MEMORANDUM OF UNDERSTANDING (MOU) IN INDIA:

Let us first understand what are the essential elements of a contract

The essential requirements of a contract have been given under section 10 of the Indian contract act 1982.

Firstly, there must be an existence of offer and acceptance.

Secondly, the parties involved in agreement must be competent to enter into a contract.

Thirdly, there must be a consent of the parties and the consent should not have been obtained by fraud, coercion or undue influence.

Fourth the parties must be above 18 years years, should be of sound mind, and shall not be declared insolvent/bankrupt.

Fifth there must be lawful consideration and lawful object and intention to create legal relations.

In our country, MOU fulfills the above essential requirements but in case the intention is not present to create legal relationship then it would not be considered as a contract.

LANDMARK JUDGEMENTS:

Several viewpoints have been considered regarding the enforceability of memorandum of understanding (MOU) .

In the case of Jyoti Brothers v. Shree Durga Mining Co.2, the Calcutta High Court laid down 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 decisive. The court will rely upon depend on the degree of importance.

In another case of Kollipara Sriramulu v. T. Aswathanarayana and Ors,3 the supreme court held that “a mere reference to a future formal contract will not prevent a binding bargain between the parties. The fact that the parties refer to the preparedness 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.”

In Millenia Realtors Private Limited v. SJR Infrastructure (Private) Limited 4, the Karnataka High Court held that Memorandums of Understanding (MoUs) are not to be interpreted as contingent contracts and are proficient of enforcement.

In the landmark case of  Structural Waterproofing & Ors. v. Mr. Amit Gupta5 the Delhi High Court held that “in the absence of proof of coercion or misrepresentation, the Memorandum of Understanding which is otherwise valid should be applied and parties should be indentured by the terms and order of the MoU.”

MEMORANDUM OF UNDERSTANDING (MOU)- INTERNATIONAL MOU:

In the International memorandum of understanding, there is no legal validity or in other words, we can say that it is not legally binding but in international MOU there is mutual understanding between two countries to perform together in a coordinated manner. MOU between two countries can be in the form of exchanging any product, supplying something in return of a different item, exchanging plans etc.

For example; Government of INDIA, ASIAN INFRASTRUCTURE DEVELOPMENT BANK sign agreement for USD 500 MILLION COVID-19 support for INDIA.6

CONCLUSION:

An agreement may or may not be legally binding completely depending on the parties entering the contract. If the MEMORANDUM OF UNDERSTANDING (MOU) satisfy the conditions laid down under section 10 OF the Indian contract act 1872, then the MOU shall be legally binding.

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