Memorandum of Understanding (MoU) is an
agreement between two or more parties laying down the terms and conditions of
the transaction, also mentioning the rights and obligations of the parties. It
forms a part of the initial discussions of the party with respect to the
transaction. It constitutes the major features of the oral discussions and
negotiations between the parties. It may also include other aspects like
financial, authorizations, duration etc.
What are the
basic features of Memorandum of
Understanding?
1. It is a preliminary document formalizing the
first level of discussions between the transacting parties.
2. It lays down the common understandings between
the parties.
- It
is a reference document for the drafting of the final agreement.
- This
enables a flexible negotiation between the parties giving them a scope to examine
every aspect and consequence of the terms decided upon.
What are major contents of Memorandum
of Understanding?
1.
Identification of
the parties with
specific details with the authorized signatories mentioned.
- Purpose and specific goals of the
parties. The parties must be clear in the objective of the transaction
being carried forward.
- Duration of such an agreement,
either with the time period mentioned or the specific dates. It may also
provide the circumstances in which MoU shall stand terminated.
- Meetings
and reporting that
are mandated by a mutual understanding between the parties. The plan of
meetings and reporting to be made should be clear to enable a flaw-free
business structure.
- Financial
Considerations which
form the part of the transaction and their form. Also mention the authorized
personnel that shall make the financial decisions. The pattern of
recording financial transactions can also be specified.
- Management including the appointment
of persons appointed to take care of day to day operations with respect to
the transactions, elaborating the role, responsibilities, and remuneration.
- Signed by authorized persons with dates.
Is
Memorandum of Understanding legally binding in India?
According to the Indian Contract Act, 1882, all agreements are not contracts.
An agreement becomes a contract only when it fulfills the following:
a)
made by the free consent of
parties;
b)
between parties which are competent
to contract;
c)
for a lawful consideration;
d)
with a lawful object, and not
expressly declared as void, and
e)
With an intention to create a
legal relation.
A Memorandum of
Understanding will fulfill all the other conditions but if it does it
constitute the intention of parties to create a legal relationship; there shall
be no binding effect of such MoU. The intent of the parties has to be construed
from the language, content and material provisions of the MoU. A MoU shall
create rights, duties, and obligations of the parties only when the clauses can
be deciphered in such manner as creating a legal obligation.
Such distinction has
t be drawn whether the parties intend MoU to be an informal agreement, an
agreement to contract or a legally binding agreement. Parties shall be bound by
it only when MoU intends to create such obligations. A specific clause as to
binding or non-binding nature of the MoU is considered best for explaining the enforceability
and binding nature.
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