It has become commonplace before entering into an Sale Deed or Agreement for Sale or any such Contract, for parties to enter into a Memorandum of Understanding (MOU) setting out the basic intention of the parties. In case of disputes, the validity of the MOU comes to be examined to determine whether it is a valid contract or not. In India, a MOU can constitute a valid and binding Agreement. However, this depends on the intention of the parties and the specific terms and conditions contained in the MOU. An MOU may only contain the desire of parties to enter into an agreement at a subsequent date. Such an MOU cannot be treated as a binding agreement.
For a MOU to be a binding contract it should contains specific terms and conditions that demonstrate that the parties intended it to be binding. Use of certain words like may, intend to, subject to, explore the possibility of, preliminary understanding, without prejudice, are non-binding indicators and signify that the MOU is not a binding contract. Contrast this with words like shall, agree and undertake, obligation, enforceable, binding, term, termination clause, consideration, and jurisdiction or governing law, indicate a binding and enforceable MOU. If from the language of the MOU it is clear that the parties intended to enter into contractual obligations with each other, then the MOU will be treated as a binding agreement.
Essentials to treat an MOU as a legally binding contract:
-Language of the MOU should clearly and unambiguously disclose the intention of the parties to bind each other.
-Essentials of a contract such as the making of an offer, acceptance, consideration, time for performance, termination if included, would make the MOU binding
-Conduct of the parties post the MOU will strengthen the argument that it is enforceable
In Motilal Padampat Sugar Mills vs State of UP, the Supreme Court of India has observed that an MOU can be valid and binding if it satisfies the essential elements of a contract, that is, an offer, acceptance, consideration and the intention to create legal relationship.
In Hindustan Steel Works Construction Ltd. vs Tarapore & Co., the Supreme Court has held that if an MOU contains clear and specific terms and the parties have acted upon those terms, then it can be considered as an enforceable contract.
Thus, to avoid ambiguity, parties must be explicit in their intentions when drafting an MOU and must ensure that the document accurately reflects the intention of the parties. It is always advisable to take legal counsel to draft the MOU to ensure that the intention of the parties is reflected accurately.
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