Skip to main content

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).
  1. 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).
  1. 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).
  1. 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.


Popular posts from this blog

Non-Banking Financial Companies (NBFC)

A Non-Banking Financial Company (NBFC) is a  company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company). Advantages of NBFC a)it can provide loans and credit facilities, b)it can trade in  money market instruments c)it can do wealth management such as Managing portfolios of stocks and shares d)it can underwrite stock and shares and oth…

Nidhi Companies in India

This article enumerates the brief transaction procedure involved in the establishment of a Nidhi Company and the laws relating to Nidhi Company in force in India. It shall be noted that the activities described hereunder covers various relevant legislations, regulations and rules, for the time being in force in India and the legal entity has to obtain approval/register itself with Ministry of Corporate Affairs (“MCA”).
Preface In the Indian financial sector, Nidhi Company refers to any mutual benefit society notified by the MCA. They are created mainly for cultivating the habit of thrift and savings amongst its members. The amount of business conducted by Nidhi Companies is not as big as commercial banks or deposit taking Non-Banking Finance Companies. Nidhi Companies are highly localized and mostly single office institutions. They are also referred to as mutual benefit societies, because they accept deposits and give loans to only their own members; and membership is limited to individ…

Types of Companies under New Companies Act-2013

With new testament of Corporate law in force has introduced several different types of companies with special features.
ONE PERSON COMPANY (OPC) One Person Company is defined in Sub- Section 62 of Section 2 of The Companies Act, 2013, which reads as follows: 'One Person Company means a company which has only one member' It shall also be important to note that Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. All the provisions related to the private company are applicable to an OPC, unless otherwise expressly excluded. ØOnly a natural person who is an Indian citizen and resident in India- üshall be eligible to incorporate a One Person Company; üshall be a nominee for the sole member of a One Person Company. ØNo person shall be eligible to incorporate more than a One Person Company or become nominee in more than one such company. ØNo minor shall become member or nominee of the One Person Company or can hold share with beneficial interest. ØT…

SEBI VS PACL: Trouble in Paradise

In its biggest-ever crackdown on a large-scale money pooling scheme estimated at nearly Rs. 50,000 crore (twice the amount to be recover from SAHARA group), regulator SEBI has ordered  Pearls Agrotech Corporation Limited (“PACL”) to refund investors within three months and wind up operations. SEBI had found PACL violating Collective Investment Scheme Regulations by mobilizing the money without being registered with the regulator, SEBI. Besides, closure of PACL operations, SEBI  is initiating further proceedings against PACL and its nine promoters and directors for fraudulent and unfair trade practices, as also for violation of SEBI's CIS Regulations, among others, as per a direction from the Supreme Court. At present, it is being estimated that PACL has more than 58.5 million customers, more than twice the 22 million demat accounts in the entire country and has paid commission of
Rs 7,893.8 crore up to March 2012  to more than its 8 lakh agents who works as network of chain system fo…

Nidhi Companies Rules 2014- An analysis w.r.t. Nidhi Company Registration

“Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings and functioning for the mutual benefit of members by receiving deposits only from individuals enrolled as members and by lending only to individuals, also enrolled as members” -Section 406, Companies Act, 2013 & Companies Rules 2014
Nidhi Company are registered or formed only for the benefit for its members only, an outsider i.e. who is not the member of the Nidhi Company is not allowed to deposit any money or doing any kind of business with the concerned Nidhi Company. In this article we will analyze the impact of Nidhi Companies Rules 2014 on the registration of Nidhi Company Incorporation of Nidhi Company i)A Nidhi Company to be incorporated under the Companies Act, 2013 (“Act”) shall be a public company and with a minimum paid up equity share capital of five lakh rupees; ii)On and after the commencement of Companies Act, 2013, no Nidhi Company shall issue preference shares; iii)Except as…

NBFC & Companies Act 2013 w.r.t. issue of Debentures

With the new testament of corporate law, Companies Act, 2013 to be effective from April 01, 2014, NBFC are facing lack of oxygen supply for their survival as to ensure that debenture issuances did not trespass into the domain of public deposits and were beginning to understand that optionally convertible debentures market will die out slowly that the rules have thrown language open to interpretation. Section 71 of the Companies Act, 2013 along with the rules implies that the debenture issuances have to be secured by specific moveable and immoveable properties. NBFCs may face a rocky time in finding these specific moveable and immoveable properties for issue of secured debenture.  Section 71 of the Companies Act, 2013 states that – 1.A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption: Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be ap…


In Sahara Desert- Distress Hours Once upon a time, Sahara’s Subrarta Roy- a friend to all who came calling-whether a matinee idol in his 80s or a sports star in her teens, self bestowed title- “Sahara Shri”- the sponsor of the Indian cricket team and a group headed by a colourful, flamboyant CEO hobnobbing with Bollywood stars and cowbelt politicianscould boast of having friends in high places. Today in this distress hours, there seems to be few people who he can turn to in his hour of distress. For the sleepy Lucknow of the 1990s whose favourite past-time seemed to be reminiscing the city’s long gone glory days, Subrata Roy Sahara brought a cash of heavy bling and some more. Sahara has stayed afloat for more than 35 years despite repeated regulatory onslaughts. The first setback was in the late '90s when RBI slashed the discretionary investment powers of its finance firm. The next blow came in 2006 when its depository services firm had to be shut down. The big jolt came in 2008 whe…