In the present-day business world, organizations that conduct business with each other enter into various agreements. As the first cordial step toward a future alliance, these business organizations enter into a preliminary agreement with them while negotiating with their prospective business partners, joint ventures, vendors, and agents.
“Memorandum of Understanding” is the official name of this arrangement. Yet, it is unclear whether or not a Memorandum of Understanding (MoU) is enforceable in India.
What is a Memorandum of Understanding?
A Memorandum of Understanding is a non-binding agreement that indicates the intention of two parties to cooperate. In India, it is also known as the Letter of Intent.
However, referring to a contract as a memorandum of understanding does not always mean that it is non-binding. The legal framework in India disregards an agreement’s nomenclature. In the case of State of Orissa v. Titagar Paper Mills Company Ltd. & Another, the Supreme Court of India ruled that:
Indeed, a contract’s nomenclature and description do not necessarily reflect the true nature of the agreement or the transaction covered by it. But, these must be determined from all of the document’s terms and MOU clauses, as well as all of the rights and outcomes resulting from them, not just by picking and choosing certain clauses.
A Memorandum of Understanding essentially indicates the parties’ understanding regarding a particular transaction or project they wish to undertake. Therefore, the mere fact that a document exists regarding an understanding reached by the parties does not automatically imply that such a document is a contract.
Every agreement is not a contract, according to the Indian Contract Act of 1872. Contracts that can be enforced in court are only those that are legally binding. So, the question of whether an MOU is enforceable in India arises.
Essential requirements for a contract as per Section 10
- There must be mutual acceptance of an offer made by one party to another.
- The parties’ permission must be freely given and unaffected by pressure, fraud, or undue influence.
- To enter into a contract, both parties must be of legal age. This requires that they be over the age of 18, be of sound mind, and not be insolvent or bankrupt.
- There must be a legal factor involved.
- There must be a legal object.
- There must be a desire to establish legal relations.
An MoU validity in India could satisfy the first-five requirements mentioned above.
The first five criteria could be satisfied by an Agreement with Indian validity. Yet, if there is no intent to establish legal relations, it is not a contract and cannot be specifically performed.
The MOU’s contents and substantive provisions can be used to determine the parties’ intentions. The rights, obligations, and duties that an MOU establishes between parties constitute its legal nature. So, it is crucial to comprehend and value the nature of the relationship established by the parties in the binding MOU.
In order to determine whether the MOU is a complete contract for which the parties consider themselves to be bound or whether it is an informal agreement that is incomplete and only an agreement to agree, a distinction must be made between the two. Such an understanding lacks thought and the purpose of establishing legal relations when the parties just record their understanding with a clause to negotiate and execute a formal, detailed agreement in the future.
In Jyoti Brothers v. Shree Durga Mining Co. (A.I.R. 1956, Cal. 280), the court ruled that a contract to enter into a contract is not regarded as a legal contract at all. The same, though, does not prove anything. The court will consider how significant this understanding was to the parties based on whether or not either of them took action based on it.
The court ruled in BrikramKishore Parida v. Penudhar Jena (AIR 1976 Orissa 4) that an objective standard must be used to determine if there was an intent to establish legal relations. Even though the promisor may not have known that his promise would result in a legal obligation, he is nonetheless obligated to fulfill his promise if a reasonable person would assume that he intended to enter into a contract.
As a result, care must be taken while choosing the words, titles, and clauses to include in a Memorandum of Understanding. The agreement is bound by clauses like the jurisdiction clause, applicable legislation, and indemnity.
MoU in real estate
In the real estate industry, MoU establishes the basic framework for the sale of the property, including the duties and responsibilities of both parties. In real estate transactions, MoU tend to provide transparency and structure to the sale process. Below are the key elements of the MoU for the sale of property in India.
Property Details
Property details are the first and most important element of the MoU. This comprises of property’s location, size, and boundaries. The MoU should also include the property’s other relevant details, such as its registration number, title deed, survey number, and land use category.
Payment Terms and Selling Price
The sale price of the property and the terms of payment should be made clear in the MOU. This covers the due date, the mode of payment, and any fines or interest associated with late payments. To prevent confusion or conflicts in the future, the payment conditions should be agreed upon by all parties and stated in the MOU.
Ownership and transfer
Details regarding possession and handover, such as the date of possession and any conditions for transfer, should be specified in the MOU. This includes any paperwork or legal requirements necessary for the property’s ownership transfer. The responsibilities of both parties with regard to the condition of the property at the time of transfer should be clearly stated in a MOU.
Regulation and legal compliance
A clause declaring that the property transaction would adhere to all legal and regulatory standards ought to be included in the MOU. This involves acquiring any licenses, permits, or approvals necessary for the sale of the property. The MOU should also clarify who is in charge of paying for these approvals and any related fees.
Dispute resolution
The MOU should specify the dispute resolution procedure in the event of a dispute. This covers the dispute resolution procedure, such as arbitration or mediation, as well as any accompanying costs. The jurisdiction for any potential legal actions should also be included in the MOU.
Non-disclosure and confidentiality
A clause declaring that the specifics of the transaction are private and cannot be revealed to any other party without both parties’ prior written approval should be included in the MOU. This is done to make sure that any private information about the property sale is not disclosed or utilized against one party or the other.
Termination
A termination clause that outlines the conditions under which the agreement may be cancelled should also be included in the MOU. Any termination criteria, such as non-payment or a failure to adhere to legal or regulatory obligations, fall under this category. The MOU should also outline the penalties and forfeitures that would apply in the event of termination.
Signatures
Both parties must sign the MOU in order to demonstrate their acceptance of the criteria contained in it. The MOU should also specify the date of signing, and the signatures should be witnessed by a qualified individual.
Bottom line
Make sure you fully read and comprehend the MOU before you put pen to paper to prevent any issues or misunderstandings later. The buyer and seller may rest easy knowing their rights are protected and the terms of the sale are clear and fair by checking that the MOU includes everything it needs to.
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