Any business requires the use of various of agreements, contracts and MoU. These three terms, even thought broadly understood by many are often confused about when it comes to their legal nature. If you too are one of those, then read on.
First let’s understand what a Memorandum of Understanding (MoU) is.
The term Memorandum of Understanding is a non-binding agreement that describes plans for a common line of action between two or more people or businesses. Since it outlines the intentions of parties, it is also called Letter of Intent in India.
What does it take for an agreement to be a contract or an MoU?
Let’s first understand that not all agreements are contracts.
Any agreement is legally binding or a contract only when it fulfils the following:
An offer should be made by one party which should be accepted by the other
All parties’ consent should be free and not caused by misinterpretation, fraud, mistake, coercion, or undue influence
All parties must be competent which means that they must be more than 18 years of age, must be of sane mind, and must not be insolvent or bankrupt.
There must be a lawful consideration. Which means that there must be a promise of giving something in return.
There must be a lawful object. Which means thatit should notbe forbidden by law, against the provision of any other laws, fraudulent, damaging to a person or property or should not be in the opinion of courts, immoral or against the public policies
There must be an intention to create legal relations.
Any agreement is an MoU when it fulfils the above 5 criteria but not the 6th one. If an agreement shows intention to create legal relations, it becomes a contract. Otherwise, it is an MoU.
Does calling an agreement or a contract a Memorandum of Understanding (MoU) make it non-binding?
Definitely not. In India, nomenclature of an agreement is not relevant and does not determine its true nature. In case of State of Orissa & Others v. Titagar Paper Mills Company Ltd. & Another, The Supreme Court of India said that:
“It is true that the nomenclature and description given to a contract are not determinative of the real nature of the document or of the transaction thereunder. These, however, have to be determined from all the terms and MoU clause of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses.”
This shows how the contents and provisions matter more than the nomenclature. Therefore, whether the MoU is legally binding or not depends on the rights, duties, obligations it creates among the parties involved.
If you need legal guidance on agreements, contracts or MoU, and are looking for corporate law firms in Delhi for the same, you may want to check out Saraf & Partners, a reputed law firm in Noida.Having successfully helped numerous clients till date in their legal transactions, it is sure to help you too. Get in touch today!
