Introduction:
A contract is an agreement that is enforceable by law.[1] However, a Memorandum of Understanding (“MOU”) need not contain legally enforceable promises. This article aims to clarify the usage of both these documents to enunciate the position of them under law.
Usage of Contract:
A contract is entered into between parties who would like to legally bind the other to the completion or execution of the terms of the document. That is, one can have a cause of action against the breach or non-performance of a legally binding contract. However, one must be careful to draft a valid agreement that entails the essentials of a valid contract for it to be enforceable in the court of law.
Usage of MOU:
An MOU is often used to define the expectations and responsibilities of each of the parties entering an arrangement. This arrangement can be between parties who would like to commence an idea together and later formalize the entire set-up.
An MOU therefore simply lays down the basic outline of:
- The scope of work/idea behind the collaboration;
- Who bears responsibility for the costs incurred;
- Insurance and liability;
- Staffing and communications;
- Conflict resolution; and such other fundamental aspects of the arrangement.
Whether the terms of these agreements are legally enforceable as a contract ultimately turns on the intent of the parties. Therefore, parties to an MOU should address the legal status of their arrangement early in the negotiation process. This will help clarify the position: current and future expectations, to all the parties.
Case laws on enforceability of the MOU:
In the general sense, the enforceability of an MOU can be divided into two categories.
They are:
- When the MOU fulfils the conditions of a valid contract as per the Indian Contract Act, 1872:
- If the MOU satisfies the conditions laid down under Section 10 of the Indian Contract Act, 1872 then, the performance of obligations laid down in the MOU can be enforced vide the Specific Relief Act, 1963.
- However, such a relief shall only be granted under the Specific Relief Act, 1963 when the damage caused to the aggrieved party by way of non-performance of the obligations mentioned in the MOU:
- Cannot be ascertained (immeasurable loss); and
- The compensation in lieu of such damages fails to become an appropriate remedy.[2]
- When the MOU does not fulfil the conditions of a valid contract as per the Indian Contract Act, 1872:
- In certain cases, the courts may find that the MOU lacks certain requirements to form a valid contract and hence the same cannot be enforced.
- However, even in the above circumstance a person still has the right to approach to the court on the basis of: [3]
- Principles of promissory estoppel; &
- Equity.
Conclusion:
Both the documents intend to clarify the expectations of the parties to the other, so that the arrangement is set on mutual agreement. However, as per the requirements of the arrangement, it would be wise to get professional advice during the negotiation phase to execute a document suitable to the arrangement(s) in mind.
The content of this article is intended to provide general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[1] Section 2(h) of the Indian Contract Act, 1872.
[2] Sen Mukherjee and Co v. Chhaya Banarjee [AIR 1998 / CAL 252].
[3] Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh [AIR 1979, SC 621].
