WHY DO WE NEED A MEMORANDUM OF UNDERSTANDING (MoU)?

A Memorandum of Understanding (MoU) can be stated as a formal agreement between two or more parties. Companies and organizations often use MoUs to set up legitimate partnerships. MoUs aren’t legally binding, but they do carry with them, a higher degree of sincerity and mutual understanding than just a ‘gentleman's word’.

More often than not, the MoU is the initial move towards a legally binding agreement.

In US, an MoU is equivalent to a Letter of Intent (LoI- A document containing a declaration of the intentions of the writer), which is a non-binding written agreement that implies a binding contract to be followed.

How an MoU works

The MoU is an expression of agreement to move forward for the parties involved.

While it is not legally binding, it is a solemn declaration that a contract is imminent.

Under the law in force in USA, an MoU, a Memorandum of Agreement (MoA), and a LoI are nearly comparable. All communicate an agreement on a mutually beneficial goal and a desire to see it be accomplished.

An MoU communicates mutually agreed expectations of the people, organizations, or governments involved. It’s most often used in international relations because, unlike treaties, it can be produced relatively quickly and secretly.

MoUs are in use in many American agencies, especially when major contracts are in the planning stages.

Usage & Significance of MoUs

Both MoUs and contracts fulfill promises made by parties to satisfy certain objectives. Also, by signing such documents, the parties commit to keep such promises. The only difference is whether the parties intend to be legally bound or not. In the event the parties are ready to form a legal relationship, the document is termed as a ‘contract’; and otherwise, ‘MoU’.

Accordingly, the MoU seems to be an appropriate fit for the following types of agreements and relationships:

Inter-departmental agreements of giant corporate entities
Agreements between regional offices of large organizations or between different entities of a diversified business group
Agreements between State Governments or between States and Central Governments
Cooperation agreements between different countries through their governments, as part of diplomatic relationships
Agreements between different ministries or between a ministry and an associated PSU (e.g. between Ministry of Power and Power Generation Entity)
‘Community development agreements’ to meet common objectives for mutual benefits where there is no intention of profit
Collaboration agreements to undertake social, moral or public cause as a volunteer

The importance of MoU is as mentioned below:

Although MoUs do not legally bind the parties involved, however, these clearly outline the terms that have been agreed upon. Therefore, by signing the MoU, the parties bind each other concerning the agreed terms so that they discharge their respective duties smoothly
MoU, being a formal document, provides complete clarity about the requirements and responsibilities of the parties. This puts an end to the actions taken by everyone to achieve the common goal. Therefore, it binds the parties ethically and professionally. It also makes the parties accountable to each other concerning the agreed terms.
Due to the above reasons, a party cannot ‘back-out’ from its commitments without losing its face-value, respect, and reputation. This demonstrates the significance of MoUs.

Case-Study

Government of Telangana and Tata Trusts sign MoU to provide state-wide cancer-care

The Govt. of Telangana and Tata Trusts declared an MoU to deliver high-quality affordable cancer-care through a three-tier model and to develop educational and research capabilities in the state. The Telangana initiative is the latest effort by Tata Trusts to decentralize cancer-care in India in collaboration with state governments and other institutions. Thereby, it was decided that a state-wide cancer-care network shall be set up to take treatment closest to patients, through beefing up the existing public health system and infrastructure.

This network shall ensure that no patient has to travel more than a few hours to reach a full suite of cancer-treatment services. The hospitals will also mount a comprehensive awareness, screening, and early detection program. The entire public health system will be galvanized to be able to play a role in the cancer-care continuum.

The proposed infrastructure would, therefore, be a platform to use national and state health, tobacco-control, and palliative care and health insurance programs such as central and state government cancer-related schemes.

In furtherance of such MoU, Tata Trusts formed a diverse group of top oncologists globally, enabling major cancer hospitals, engineers, and contractors connected to the national cancer grid to access the infrastructure required for cancer-diagnosis and treatment.

Legal Position of MoUs in Indian Law

As mentioned above, we can now understand the fact that MoUs do not have to be non-binding. Also, we can conclude that the legal position of MoU in Indian legal system relies upon the intent by which such a document is formed, and thus, such an intention of forming a legal relationship through such an MoU plays an important role in determining the legal position of the latter.

Moreover, it must be noted that the creation of such MoU holds primary significance in setting the legality around it, and that the construction of words play a substantial role in the same.

If the parties intend to form a legally binding effect to an MoU, then:

(i) The construction of the words shall be of such nature-

(a) Use of the word ‘shall’ instead of ‘may’

(b) Use of ‘would be’ instead of ‘can be’

So on and so forth. The use of such words seeks to create a legal relationship by making the other person liable for a certain act.

(ii) Legal binding clause-

(a) An MoU will be legally binding if the parties agree to insert any such clause, the reading of which would mean that such MoU intends to form a legal relationship between the parties to the contract and that the non-compliance of such provision would attract the same treatment as provided for ‘breach of a contract’ under the Indian Contract Act (ICA), 1872.

(b) In consistency with Section 10 of ICA 1872

(c) If an MOU satisfies all the conditions laid down under u/S. 10 of ICA, then such MOU should be defined as a ‘contract’ u/S. 2 (h) of ICA.

(iii) Insertion of a Dispute-Resolution clause

(a) If an MoU incorporates a dispute-resolution clause; it obligates the parties to perform their obligations as specified in such MoU. Non-performance of the same shall result in breach/dispute for which the MoU will provide a clause in itself, providing the method in which such dispute will be resolved amicably and in good faith.

Thus, from the above discussion, we can safely state that - the principal law governing the MoU in India is dealt with by the Indian Contract Act, 1872. Also, there must be a clear intention to legally bind the parties to a contract to implement the MoU, legally, whereby both come under a specific obligation to perform their duties.

Concluding Comments

A MoU can be defined as an agreement between two or more parties cited in a formal document. It is not legally binding but indicates the willingness of the parties to proceed with the contract.

The MoU can be seen as the starting-point for negotiations, as it defines the scope and purpose of such negotiations. Such memoranda are often witnessed during international treaty negotiations, but can also be used in high-stakes trade deals such as merger negotiations.

Any contract, being a contract, must fulfill the provisions of Section 10 of the Indian Contract Act, 1872. A mere agreement is not legally binding or enforceable. It is well-settled rule that if an MoU meets the conditions of S. 10 of ICA (coupled with intention to create legal relation), then it shall be legally binding.

An MoU may be implemented despite deficiencies based on equity and promissory estoppels, as held in 1934 by the Hon’ble High Court of Calcutta, in the case of Subimal Chandra Chatterji v. Radhanath Ray.

By HARSH SONBHADRA (VIPS, New Delhi)

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