What is Memorandum of Understanding?
Memorandum of Understanding (MoU), also known as Letter of Intent, is a medium through which two parties reach to a final outcome or decision. The memorandum comprises of all the terms and conditions as well as the rights and obligations of both the parties. It is the starting point of the negotiation and is used massively for the business deals.
Advantages of Memorandum of Understanding
- Reduces uncertainty of risk
- Establishes a common intention between the parties.
- Reduces chances of fraud by the parties
- Records prior agreement between the parties
- Framework for future dealings
When is Memorandum of Understanding required?
1) It is required to reach to the common understanding between the parties.
2) To frame a formal contract between the parties.
Contents of Memorandum of Understanding
- Objective or purpose of entering into MoU
- Key role of each parties
- Responsibilities of each member
- Duration of the MoU
- Confidentiality clause
- Severability clause
- Litigation clause
- Indemnity clause
MoU is governed by the Indian Contract Act, 1872, and if conditions under the Indian Contract Act are fulfilled, then the performance of an MOU can be enforced under the Specific Relief Act, 1963 where a Specific relief. In case where the conditions under the Indian Contract Act, 1872, are not fulfilled, the MoU is not recognised as a legally valid contract. But, it can still be enforced in the court of law based on the principles of promissory estoppel and equity.
Normally, no stamp duty is payable on MoU. However, if the MoU involves a transaction which needs to be compulsorily registered under the Registration Act, 1908, then it has to be stamped. A stamp duty paid registered document gets an evidentiary value and can be submitted as an evidence in the court.