MOU
Querist :
Anonymous
(Querist) 13 May 2010
This query is : Resolved
What is the validity of MOU in eye of law.
A V Vishal
(Expert) 13 May 2010
It is difficult to define the term Memorandum of Understanding. It is generally regarded as a preliminary statement of the intention of the parties or a convergence of the will of the parties. Many a time, the intention of the parties is to have an MoU as a matter of record intended as a guide for future transactions. It is also not uncommon for parties to enter into a non-binding MoU. In such cases, the non-binding nature of the MoU is clear as is stated in the document itself.
If the wordings used in the MoU are vague and unclear and do not create any binding effect, then the same cannot be enforced. The parties may use vague terms and may not implement any of the guidelines or terms and conditions contained in the MoU. The subsequent behaviour of parties may also show that the MoU was only an attempt to have a future relationship and only sets out the scope of transactions. In such cases also, the MoU may not be an enforceable document.
Though styled as MoU, many such documents are often agreements for sale, agreements for joint development or other agreements relating to future transactions in respect of a property. The nomenclature is not an important factor for determining the nature of the document. The contents have to be looked into. In the background of the above facts, there is a choice on the parties to make it a binding or a non-binding document. Where the intention of the parties is to make the MoU a binding document, it is advisable to follow certain guidelines in drafting the same.
At the outset, the parties have to come to a clear decision that a MoU would be the document that will serve the best interests of the parties. The scope of the transaction has to be clearly set out in the MoU. Thereafter, the terminology to be used in the document has to be clearly understood. The wrong usage of terminology may result in the MoU being interpreted in a manner not intended by the parties.
The parties to the document or the participants or their representatives, as the case may be, have to be clearly identified. It is desirable to have a short explanation as to why the parties have decided to enter into an MoU. The expectations and the role of the parties can also be included.
The MoU should state the nature of the work or project that is to be accomplished. If the execution is contemplated in a phased manner, the phasing should be identified. The schedule of work and the transition to the next phase may have to be properly captured. If the work involves the participation of a third party, then the obligations or the responsibilities such third party have to be furnished. Payments to be made or incurred in the process have to be clearly stated. In many cases, it would be advisable to quantify or cap the payments. Aspects relating to possession of the property have to be incorporated. .
Certain terms may be left open for future decisions. If the parties feel that there is a need to execute further documents, then the requirements for executing such documents have to be set out. Drafts of future documents to be executed can also be attached to avoid misunderstanding at a later date. The deadlines for implementing or completing the project have to be specified. The financial implications relating to the project are to be clearly spelt out. If the matter involves cost sharing, then the sharing pattern has to be mentioned. The MoU may also provide for legal due diligence and / or financial due diligence. The outcome of such due diligence may result in the project being pursued further or otherwise. The options of parties at this juncture will have to be clearly defined.
Issues such as payment of taxes, obligations of parties, milestones to be achieved have to be specified. In the event of any dispute arising even at the preliminary stage, then a dispute resolution mechanism has to be provided. The jurisdiction of courts can also be agreed upon.
In recent times, documents such as heads of terms, letter of intent are also used along with or in similar circumstances as the MoU.
These documents are mostly non-binding in nature. Such documents are also referred to as memorandum of terms or memorandum of intent, etc and may be in the nature of an MoU. The use of wordings is very important and vital. If the MoU is to be a binding document, then words like, "agree", "undertake", "shall", "obligations", "rights", "entitlement", etc implying the agreement between the parties may be used. If the same is to be a non-binding document, words like "concur", "arrangement", "intend", "will", "responsibilities", "benefits", etc are employed. However, the enforcement or otherwise will have to be decided by reading the MoU as a whole and ascertaining the intention of the parties. If you are placed in a situation where you have to enter into or deal with an MoU, make sure that the document reflects your intention and future course of action.
B K Raghavendra Rao
(Expert) 13 May 2010
MOU is only a document of understanding between two or more parties and do not have binding nature. It cannot be enforced in a court of law. At the best, it could be a supporting evidence. It is only a memo of intention. This is usually entered into to avoid future misunderstanding and dispute of intentions.
N.K.Assumi
(Expert) 13 May 2010
Thanks Vishal and Rao for the information on MOU.
Manish Singh
(Expert) 19 May 2010
if any consideration is there n the MoU, the same can be specifically enforced in the court of law.
