MoU full form
MoU stands for Memorandum of Understanding. It is a non-binding contract describing the intention of two people or a business to work in consensus. An MoU is also sometimes referred to as a letter of intent in India. The MoU details the understanding between parties concerning a particular transaction or project that they wish to undertake.
Although an MoU is not a legal document, it allows the parties to write down their expectations. MoU allows parties to prepare for signing a contract and manage mutual expectations. Communicating what each party hopes to gain from an agreement, in clear terms, can be essential to the smooth execution of a legal contract in the future.
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MoU: Essential parts
1. Parties of the agreement:
An MoU should mention and describe the parties in the agreement. The parties and their organisation should be easily identifiable.
2. Purpose of the MoU:
A clause for defining the purpose of the agreement should be present. This clause should describe the reason for the creation of the MoU. The overall intention of the parties should be mentioned, so as to not have any undisclosed intentions that may lead to a future dispute.
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3. Duties and responsibilities:
The duties and responsibilities of each party should be mentioned separately. The parties should also clarify the duties that would be shared mutually.
4. Period:
The period from which the MoU will come into effect and the period of dissolution of the partnership should also be added. The exact date on which the agreement is entered into, should be in the top part of the agreement.
5. Meeting minutes:
The MoU should specify when and how frequently the two parties will meet. The meetings can happen monthly, quarterly, or yearly.
6. Investments:
The MoU should specify the investment amount made by each party. It should mention the person responsible for making financial decisions. The party member responsible for auditing the financial reports should be mentioned in the MoU.
7. Management hierarchy:
The MoU should clearly state the roles, responsibilities and remuneration of the people involved in the operations.
8. Signature and dates:
Once the MoU has been prepared, understood and agreed upon by parties, it should be signed and dated by the authorised individuals representing each party or organisation.
MoU advantages and disadvantages
MoU advantages:
- It allows all parties to clearly state their goals and objectives, in writing.
- There is less room for uncertainty, preventing future unexpected disputes.
- The MoU serves as a blueprint for the contract that the parties may or may not wish to draw up in the future.
MoU disadvantages:
- MoU is not a legal document and does not bind the parties under any law.
- Parties can walk away or change their expectations.
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Essential requirements for a legally binding agreement or contract
Section 10 of the Indian Contract Act, 1872 lays down the essential requirements of a legally binding agreement or contract:
- An offer must be made by one party and accepted by the other.
- The consent of the parties must be free and not affected by fraud, coercion, or undue influence.
- The party must be competent to enter into a contract.
- Party members should be over 18 years old, have a sane mind and not be considered insolvent/bankrupt.
- There must be lawful consideration.
- There must be a lawful object.
- There must be an intention to create legal relations.