MoU vs. Agreement

Introduction

In every business, understanding between the parties is zeroed down to documentations, which begans with Memorandum of Understanding (“MoU”). MoU preceeds formal agreements and their drafting is a challenge especially in huge transactions. A simple definition of memorandum will mean an informal written record of an agreement which has not yet become official. MoU can be called as “Gentleman’s Agreement” simplicitor or a stage preceding formal understanding into an agreement to govern a future relationships. The legal jargons needs to be understood well even for the signatories as the same may be basis of future litigations. Whether or not a document constitutes a binding contract would depend upon the following elements- offer, acceptance, consideration and intention to be legally bound which are essential for a contract. In international relations, MoU falls in broad category of treaties.  It is important to go through each and every word of the document as there are many documents that are not legally binding in spite of the fact that they are drafted by a lawyer and signed by the witnesses. Although there can be legal distinctions between the two aforesaid types of documents, there may be no legal or practical difference if they are written with similar language. The key is whether the parties intend to be legally bound by the terms of the agreement or not. The article focusses on key to understanding the drafting of the two documents.

A. Difference between MoU and an Agreement

According to section 10 of the Indian Contract Act, 1872, states what agreements are contracts- All agreements are contracts, if they are made by the:

  • Free consent of parties competent to contract,
  • Lawful consideration and with a lawful object, and
  • Not hereby expressly declared to be void.

Agreement contains proposals and its acceptance and intention of the parties is to bind each other with the terms of the agreement. It is the intention of the parties that if anyone violates the terms of the concerned agreement, the other will go to the court and get it enforced.

In case of MoU, both the parties proposed their intention and a commitment to follow the intention in future. It does not create a valid contract, but if one party do anything on reliance of the MoU and sustains any loss, he can recover back the losses but cannot enforce the same. Both the parties of MoU are bound by the estoppels and any of them cannot take the adverse. For instance, an MoU could be useful while making a real estate deal. Suppose you have chosen a house that you would like to buy but can only pay for it after six months. In the meantime, you could make a small advance payment and draw up a MoU with the seller stating the terms and conditions from both the sides. The house owner can include that if you fail to make full payment within six months, he would have the right to refund the advance payment and sell the house to somebody else. However, after six months when the sale actually takes place, you would need a more concrete document that is legally binding.

An agreement is a legal document that is formed after finalising the deal and it is binding document.

Memorandum of Understanding (MoU) is actually just a means for two parties to reach a decision. It is used two gauge the intention of the transaction parties before a deal is officially signed between them and doesn’t grant either of them any rights. So, in some cases it may make more sense to opt for a softer, non- legal document, than a legally binding one. MoU specify mutually accepted expectations between two or more parties or organisations as they labour together towards a common objective. For example, two agencies that have similar goals, may agree to work together to solve a problem or support each other’s activities by using an MoU. The MoU is nothing more than a formal handshake. In U.S law, a MoU is synonymous with a Letter of Intent (LoI), which is a non- binding written agreement that implies a binding contract is to follow. MoU becomes binding on all parties if it has been drafted for a monetary exchange.

B. Essential Ingredients of Drafting a MOU and an Agreement

Before we learn to draft MoU or Agreement, we look at the systems of law- Common Law system and Civil Law System. Former was prevalent in England and its colonies whereas the latter is more so in rest of the Europe derived from Roman Law. The Common Law emphasises on role of judge whereas the Civil Law focusses on codes and commentaries. In common Law system there is a established practice of recording court decisions, so that the same can be used to resolve the later disputes and this principle is enshrined in doctrine of stare decis. Whereas on one hand common law is very analytical the civil law is more precise in its dealing. So before understanding the drafting of contract for domestic or international parties it was important to have a preview into understanding legal background of the parties.

C. Drafting the MoU and Agreement

1. Title

The title of the MoU/agreement should reflect the nature of transactions between the parties.

2. Identification of the Parties

The introduction of drafting a MoU and Agreement is more or less same. Before discussing the structure and content of MoU, it is important to discuss the following principles:

(a) There is a mutual desire of both the parties of equal commitment to work together.

(b)The provisions of MoU should not be in conflict with any existing MoU or agreement entered by the organization between the parties inter se and the third party.

(c)The language of MoU should be simplicitor, unambiguous and open to review.

(d) MoU is a living document so it should be kept alive for review.

(e)Since MoU is a formal document it should be drafted with legal, technical and financial experts.

A contract on the other hand may be defined as exchange of relationship created by oral or written agreement between two or more persons containing atleast one promise and recognized in law as enforceable.

5E. Figure 1

5E. Figures3. Background/Recitals

MoU: Statement defining the context and general agreements and benefits of the MoU. A brief summary of circumstances leading to the MoU. The status of MoU in relation to other existing agreements should be mentioned.

Agreements: Most transaction agreements begain with the Preamble/Recitals/Whereas. In many cases where it begins with Whereas the entire terms of recital commences with the term “Whereas”. This outlines the purpose of the entire transaction.

4. Legislative Context

The MoU should contain the legislative context i.e. the statement to the extent it is legally binding as well as relevance to any law to which the parties are subjected to.

5. Definitions

The goal of drafting a transactional material is that it speaks unambiguously for future readers, which include your client, judge, third party. A good way to achieve this is by using “Definitions”.  This should find place in both MoU and Agreements.

6. Purpose of MoU

This broadly defines what a particular MoU actually covers i.e probable outcome of MoU and societal benefits. It defines every area that both the parties are going to cover in the MoU.

For example– This MoU covers the roles of the organisation X and Y in the operation of the severe weather and flood warning and emergency management systems for a place in Maharashtra, that includes-

  • Severe weather and flood advice, forecasting and warning systems
  • Rainfall, water level and flood data information collection and sharing, and
  • Effective X and Y coordination of consistent and timely information to flood-prone residents in Maharashtra.

Within the purpose of the Agreement, you can add the mode of implementation of the Agreement if any reference to any special law/ principal/regulations or guidelines needs to be adhered the same can find reference.

5E. Figure

7. Consideration of an Agreement

The consideration of an agreement should be clearly stated or exchange of mutual promises. This must be expressly stated since agreement must be supported by consideration and there must be mention of exchange of dollars/rupees or goods or mutual promises. The most common form of consideration is money but goods and services are also valid consideration.

If it is an international agreement, it would be good to mention the currency in which the consideration would be paid to avoid hassles including the conversion date as well. This can help the court also to award damages or cost accordingly.

8. Joint Undertaking and Responsibilities

A statement describing the joint responsibilities and action of each party including the   description of cooperative activities, description of exchange of resources. Reference to relevant timelines, milestones, protocols of communication between the parties.

9. Other Clauses

5F. Figure 1

10. Indemnification Clause

As per section 124 of the Indian contract Act 1872- a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ” contract of indemnity”. 

The definition raises question itself, whether indemnification clause should find place in MoU 

(a) Damages on breach of contract under section 74 of Indian contract Act 1872:  Compensation for breach of contract where penalty stipulated for: When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Explanation-A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

The kind of damages that can find place are-

(i) Compensatory Damages – money to reimburse for costs to compensate for your loss.

(ii) Consequential and Incidental Damages – money for losses caused by the breach that were foreseeable. Foreseeable damages mean that each side reasonably knew that, at the time of the contract, there would be potential losses if there was a breach.

(iii) Attorney fees and Costs – recoverable, if expressly provided for in the contract.

(iv) Liquidated Damages – these are damages specified in the contract that would be payable if there is any issue as to its performance.

(v) Punitive Damages – This is money given to punish a person who acted in an offensive manner in an effort to deter the person and others from repeated occurrences of the wrongdoing. You generally cannot collect punitive damages in contract cases.

(vi) Rescission – The contract is canceled and both sides are excused from further performance and any money advanced is returned.

(vii) Reformation – the terms of the contract are changed to reflect what the parties actually intended.

(b) Damages on breach of contract of indemnity under section 125 of Indian contract Act 1872 The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor—

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

(c) Section 73-Compensation for loss or damage caused by breach of contract-When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. —When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”

Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract.—When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. —When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.” Explanation.—In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

11. Clause for Restraint of Legal Proceedings

Section 28 :Agreements in restraint of legal proceedings, void.

Every agreement:

(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.

Exception 1.— Saving of contract to refer to arbitration dispute that may arise. —This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception 2.— Saving of contract to refer questions that have already arisen. —Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration. 

12. Termination Clause

Each party will have right to terminate the MoU/agreement after serving the notice period. The clause will also reflect its impact of ongoing activities on the termination.

13. Dispute Resolution Clause

The parties generally do not have considerations involved in MoU unless it has binding effect of an agreement therefore, formal means of dispute resolution like arbitration should be avoided.

5F. DRC

The Supreme Court of India (“Supreme Court”) in the recent case of Ashapura Mine-Chem Ltd v. Gujarat Mineral Development Corporation  has addressed the issue of separability and survival of an arbitration clause contained in a Memorandum of Understanding (“MoU”). The Supreme Court held that the arbitration agreement in the MoU was valid as it constitutes a stand-alone agreement independent from its underlying contract. The Supreme Court relying on several judgments including Reva Electric Car Co. Pvt Ltd. v. Green Mobil 2002 (2) SCC 93 and Today Homes and Infrastructure Pvt. Ltd. v. Ludhiana Improvement Trust 2014 (5) SCC 68 and Enercon v Enercon 2014 (5) SCC 1  concluded that in addition to the fundamental nature of the separability presumption, the dispute between the parties relates to the relationship created by way of the MoU and so the arbitration agreement contained therein would bind the parties.

The Supreme Court found that irrespective of whether the MoU fructified into a full-fledged agreement, the parties had agreed to subject all disputes, arising out of and in connection to the MoU, to arbitration. Such an agreement would constitute a separate and independent agreement in itself. Since no consensus was reached on the appointment of a Sole Arbitrator, it would be open to the parties to invoke Section 11 of the Act. Based on this ground alone, the Supreme Court set aside the order of the Gujarat HC, and appointed a Sole Arbitrator due to existence of a valid arbitration agreement.

12. Dispute Resolution

Negotiations

The Parties will attempt in good faith to resolve any dispute or claim arising out of or in relation to this MoU/ Agreement through negotiations between a director of each of the Parties with authority to settle the relevant dispute. If the dispute cannot be settled amicably within fourteen (14) days from the date on which either Party has served written notice on the other of the dispute then the remaining provisions of this Clause shall apply.

Arbitration

In the event of a dispute between the Owner and the parties concerning the interpretation of any provision of this agreement or the performance of any of the terms of this Agreement, such matter or matters in dispute shall be finally settled: –

  1. under the Rules of _______________________;
  2. by one/three arbitrators, one appointed by each Party, and the third, who shall be the chairman, selected by the two appointed arbitrators and failing agreement by the Chairman of the International Chamber of Commerce;
  3. the language of the arbitration shall be English; and
  4. the place of the arbitration shall be _________________.
  5. The award will be final and binding to both the parties

Referral to the Expert (may be appropriate for technical/ financial matters)

The following provisions shall apply between the Parties with respect to any matter, difference or dispute which this Agreement provides is to be referred to an Expert:

(a) Where any matter is referred to an Expert in accordance with this Clause [ ], the Expert shall be appointed by the Parties, or in default of agreement upon such appointment within _______ days of a Party notifying the other Party of its decision to refer the matter to an Expert, an Expert appointed by

In relation to disputes of a primarily technical nature; or

Failing agreement between the parties as to the nature of the dispute, the Expert shall be appointed by the _____________(person nominated by some specialized body)

The Expert will resolve or settle such matter or dispute in such matter as he shall in his absolute discretion see fit. The Expert shall be requested to reach his decision within ________days of the matter being referred to him. Any decision of the Expert shall be final and binding on the Parties.

The cost of the Expert in settling or determining such matter or dispute shall be borne equally by the Parties unless the Expert otherwise determines.

13. Performance to Continue During Dispute

Performance of the Agreement shall continue during arbitration proceedings or any other dispute resolution mechanism as per the agreement between the parties

14. Intellectual Property Rights

The IPR Clause should include the following components:

(a)  What is intellectual property rights?

(b) Who owns the intellectual property rights?

(c) Who may use the intellectual property rights and who may have the funds?

(d)Dispute resolution

5F. Intellectual Property

14. Language for Drafting Agreements

5F. Figure 2


Conclusion

Every contract or ageement should be carefully drafted with insight into minds of parties to contract. The clauses may be standard but facts may vary from party to party.

The research work of the article is done by Ms. Aparna Agarwal, Second Year Law Student at Symbiosis Law College, Noida.

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