What is a Memorandum of Understanding (MOU)?
A memorandum of understanding (MOU) is an agreement between two or more parties outlining the terms and details of an understanding in a formal document. It is also a starting point for negotiations as it defines the scope and purpose of the talks. It is a preliminary understanding between the parties to a contract, prior to the execution of a formal agreement. The document highlights the intention of the contracting parties, therefore, it is also referred to as a Letter of Intent (‘LoI’).
It is not legally binding but signals the willingness of the parties to move forward with a contract. It is only an “agreement to agree” and highlights business relationship, which, are likely to result in some contract or any formal agreement between the parties. However, it can create an obligation upon the parties if a binding understanding is inferred from the clauses of the MOU.
If the Memorandum is binding, the principles of contract law and the Contract Act, 1872 will apply to it. However, if the Memorandum is not legally binding, there is no law that directly applies to it.
Advantages of MOUs
- Establishes a Common Intention
- An MOU allows for the establishment of a mutual intention. It enables each party’s goals and objectives to be clear.
- Trail of Prior Agreements
- Additionally, the finalisation of an MOU allows for having a paper trail or records of the terms that have been in the negotiations leading towards finalisation.
- Reduces Risk of Uncertainty
- MOUs reduce the levels of uncertainty between the involved parties because the document usually highlights the expectations and objectives and prevents possible future disagreements.
- Ease of Ending agreements
- It provides ease of exit, as any party that finds the objectives and goals not met can easily end the agreement.
- Provides a Framework for Future dealings
- Because the MOU already outlines objectives and terms, the document can serve as the foundation for a possible future contract.
Features of MOU:
A Memorandum of Understanding should have the following features:
- Name & other details of the parties between signing the memorandum of understanding
- Purpose and the goals for which the memorandum is being signed.
- The scope of the documents, which is thereby made during the agreement.
- Sets out the roles and responsibilities of the parties.
- Although they are not legally binding but are enforceable under Indian laws.
- Can involve any exchange of money or any valuable consideration.
- Contains indemnification clause.
- Joint undertaking and responsibilities.
- The termination clause is also there for the parties.
- Dispute resolution clause.
FAQs
An MOU is not legally binding but it indicates the willingness of the parties to go ahead with a contract. The MOU can be seen as the origin point for negotiations as it describes the scope and purpose of the talks.
Normally, no stamp duty is payable on MOU. However, if the MOU incorporates an agreement to purchase immovable property worth more than Rs. 100/-
1. Companies or organisations can execute an MOU to establish partnerships with each other or individuals,
2. A Government Agency can execute an MOU with another agency within the same Government or another country’s Government,
3. Countries can independently execute an MOU with another country/other countries,
4. Individuals,
5. Entities,
6. Trusts, etc.
Hey @HarshitShah
Yes. Any time the terms of the agreement change, this should be documented in a new contract. The new contract should also make clear this contract replaces the old contract.