Memorandum of Understanding or MOU is an agreement made when two or more parties wish to outline the rights and obligations of the parties and agree on a common course of action to reach a valid conclusion. It is a formal agreement and is not legally binding on its parties. To be legally operative, an MOU should clearly lay down the name of the parties, the object of the contract, and summarise the important terms and conditions. They are usually less time consuming and avoid legal implications as involved in a contract. This is because a legal agreement contains risks, warranties, and indemnifications due to the nature of the contract involving the exchange of money or other considerations to validate it. MOU provides a roadmap to a non-binding agreement highlighting effective negotiations between the parties involved in achieving a shared goal.
To draft/generate an MOU, participating parties need to reach a mutual understanding. In the process, each side learns what is most important to the other before moving forward.
The process often begins with each party effectively drafting its own best-case MOU through a professional skilled in the process.
It considers all ideal or preferred outcomes, what is being offered to the other party(s), and what points may be non-negotiable.
- Names of parties.
- Specific points of understanding between the parties
- Description of the project
- Roles and responsibilities of each party
1. Is an MOU a legally binding document?
MOUs aren’t legally binding per se. MOUs are mere understandings between two parties that are legally documented but are not binding on the parties. However, if an MOU is drawn up for the exchange of money, it becomes legally binding due to the presence of consideration.
2. Should stamp duty be paid on an MOU?
MOUs, usually, are not affixed with a stamp duty, however, a stamp duty paid document is considered as having evidentiary value and is hence admitted in the court. Therefore, if an MOU is drawn with respect to immovable property or money as consideration, having stamp duty paid on the document is advisable.
3. Why is MOU made if it is not legally binding?
An MOU is made for the parties to document a potential legal obligation in the future.
4. Is MOU enforceable by law?
In general, MOU is governed by the Indian Contract Act, 1872. In case of fulfilment of condition under the Indian Contract Act, the performance of an MOU can be enforced under the Specific Relief Act, 1963 where a Specific relief is granted when compensation cannot be ascertained in monetary terms. In cases where conditions under the Indian Contract Act, 1872, are not fulfilled, MOU is not recognised as a legally valid contract. However, it can still be enforced in the court of law based on the principles of promissory estoppels and equity.
5. Which entities can establish Memorandum of Understanding?
- Companies or organizations can execute an MOU to establish partnerships with each other or individuals.
- A Government Agency can execute an MOU with another agency within the same Government or another country’s Government.
- Countries can independently execute an MOU with another country/other countries.
- Individuals with other individuals or company.
- Legal Entities and Trusts
6. What is the purpose of an MOU?
The purpose of an MOU is to broadly define what a particular agreement actually covers i.e. probable outcome of an agreement and its benefits. It defines every area that both the parties are going to cover in the agreement.
7. What is the duration of an MOU?
Generally, an MOU lasts for the duration of an agreed period or the happening of a certain event.
8. Are the parties to MOU deemed partners or agents of one another?
There is no such relationship. Each party is independent and responsible for its own actions.