Memorandum of Understanding| Explained

It is essential that before entering into a contract the parties to the contract reach an understanding on the same level. This requires that the parties agree in the same manner to the same thing. Ironing out all such minor details at the time of entering into a contract is necessary. However, sometimes the parties to the contract may just want to formulate a preliminary agreement that establishes the relationship between them but at the same time gives them some leeway which a formal contract may not. Such a preliminary agreement is called a memorandum of understanding.

A memorandum of understanding or MoU is the first step taken in the formulation of a legally binding contract. It is an agreement between two or more parties detailing the terms and conditions of the deal taking place between them. It specifies the requirements and responsibilities of each party.

However, every agreement is not a contract. While an MoU is an agreement, it is not necessarily a contract and may not be legally enforceable in a court of law.

Features of a memorandum of understanding.

Like other types of agreements, a MoU is a document comprising of certain features. A few of the key features to be included in a MoU are:

1. It mentions in the detail who the parties to the agreement are.
2. It elaborates the arrangement between the parties and the purpose for which the memorandum is being made.
3. It defines the role and responsibilities of the parties to the memorandum.
4. The memorandum may include an indemnification clause which protects either party from any loss that may occur to them owing to the actions of the other party.
5. The memorandum sets out the rights and obligations of both parties and the responsibilities ensuing from their joint undertaking.
6. The memorandum may contain a clause for any monetary value or consideration to be paid.
7. There may also be a clause for dispute resolution for any disagreements arising in regard to the MoU and the obligations of the parties to it.
8. The MoU may include a clause specifying when and how the memorandum can be terminated.

Legality of a memorandum of understanding.

As previously mentioned, a memorandum of understanding is not necessarily legally enforceable. Therefore, it becomes imperative to understand the legality of it. A MoU is often termed as a "softer" document. When looking for a temporary solution, a MoU is an ideal option. It is a document showing the intention of the parties in relation to a project. However, unlike a contract, it does not show the intention of the parties to enter into a legal contract. Therefore, it is not legally enforceable.

The drafting of the MoU is what ultimately decides whether it will be legally binding or not. Where a lawyer has taken care to include certain words or phrases which convey the full intention of the parties to make the MoU legally valid, the MoU may become enforceable in the court of law.

A memorandum of understanding may become legally binding depending on the reason it was formulated. For example, if an MoU is drawn for consideration or in exchange of money it becomes legally binding on the parties. If a party to the MoU has suffered any loss due to the violation of the MoU by the opposite party, he can recover only such loss from the party presenting the MoU as proof. However, this does not mean that the MoU itself becomes legally enforceable. The legality of MoUs is still an area that has remained unexplored. Thus it is advisable to parties to seek a legal agreement where the they want to be able to enforce their contracts.

Memorandum of Understanding v/s Contracts.