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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