Enforceability aspects of a Memorandum of Understanding (MoU)

The question whether a MoU is binding or non-binding is a question of general contract law. As is the case in a contract a MoU will be binding if there is a valid offer and acceptance, consideration and intention to be bound by the agreement. The most important pre-condition for a MoU to be legally binding is that it should be certain. The courts do not expect commercial documents to be drafted with strict precision. However, for an MOU to have legal effect, the essential terms must be sufficiently clear and certain.

Arguments in favour of enforceability of a MoU

1. When the terms of a MoU are clear and conclusive and a contrary intention not to be bound by its terms does not exist a MoU should be given effect to as a normal contract.
2. Merely because a MoU is a preliminary agreement by which the terms agreed upon are to be put in a more formal shape does not prevent a binding contract.

(See, Kollipara Sriramulu (dead) by L.R. v T. Aswatha Narayana (dead) by L.R., AIR 1968 SC 1028;

“Where the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of a further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract, while in the latter there is a binding contract.”

See also, Currimbhoy and Company Limited v. L.A. Creet and Ors, AIR 1933 PC 29).

3.      A MoU is enforceable on the principles of equity. Equity holds people bound by a contract, which, though deficient in some requirement as to form, is nevertheless an existing contract.

(See, Subimalchandra Chatterji v. Radhanath Ray, AIR 1934 Cal. 235).

4. A MoU signed between parties is enforceable in law. The execution of a separate agreement is not a condition precedent and the Supreme Court in more than one case, cited by the appellant herein, has held that such contracts are not to be construed as contingent contracts and are capable of enforcement.

(See, Millenia Realtors Private Limited v. SJR Infrastructure (Private) Limited, 2005 (6) KarLJ 36).

5. In some cases even oral correspondence was construed by the Court to constitute a enforceable contract where there was sufficient manifestation of the interests of parties. Thus, the argument in favour of enforceability of a MoU becomes stronger.

(“It is the duty of the Court to construe correspondence with a view to arrive at a conclusion whether there was any meeting of mind between the parties, which could create a binding contract between them but the Court is not empowered to create a contract for the parties by going outside the clear language used in the correspondence, except insofar as there are some appropriate implications of law to be drawn. Unless from the correspondence, it can unequivocally and clearly emerge that the parties were ad idem to the terms, it cannot be said that an agreement had come into existence between them through correspondence. The Court is required to review what the parties wrote and how they acted and from that material to infer whether the intention as expressed in correspondence was to bring into existence a mutually binding contract. The intention of the parties is to be gathered only from the expressions used in the correspondence and the meaning it conveys and in case it shows that there had been meeting of mind between the parties and they had actually reached an agreement, upon all material terms, then and then alone can it be said that a binding contract was capable of being spelt out from the correspondence.”

See, Rickmers Verwaltung Gimb H. v. Indian Oil Corporation Ltd., (1999)1 SCC 1).

6. In some cases the Courts have even enforced MoU’s where its term period and validity had expired. In this case, the MoU was kept on hold owing to the model code of conduct brought forth by the Election Commission due to which it expired.

(See, Intelligence Decision System (India) Pvt. Ltd. V. Chief Election Commissioner, AIR 2006 Ker 229).

Arguments against enforceability of a MoU

The arguments against enforceability of a MoU are not very strong. However, some of them are:-

1. A MoU is a privately entered agreement which is contingent on the execution of a further agreement. Such a contingent agreement is not sufficiently certain and has no basis in law.
2. From a practical perspective, although an MoU may help to secure some form of commitment of the parties to the negotiation process, it is unlikely to provide commercial certainty to the outcome of the negotiations and hence should not be enforceable.

Concluding remarks:

In MoU, it is important to be aware of the legal and practical implications of the terms of the MoU. MoU may unduly limit future negotiations and impose onerous obligations on the parties.

The enforceability of MoU depends on the circumstances of the negotiations and the terms agreed by the parties.

Though MoU provides some form of commitment of the parties to the negotiation process, it does not provide the 100% commercial certainty to the outcome of the negotiations.