Intention

MOUs becomes legally binding when the intention of the parties to enter into a definitive agreement/contract reflects apparent on the face thereby letting know that they intend to create a legal relationship between them. The Supreme Court, in the case of Orissa & Others v. Titaghur Paper Mills Company Ltd. & Another held that "a Memorandum of Understanding embodies the understanding of parties with respect to a particular transaction or a project which they wish to undertake. However, the mere existence of a document with respect to an understanding reached between the parties does not necessarily lead to the conclusion that such document is a contract."

In the instant case the intention of the parties can be can be deduced clearly. At the time of entering into the MOU, the formation of a definitive agreement was subject to the awarding of tender to ABC PVT LTD. Furthermore the MOU did not lay out the specific roles and responsibilities of the parties. A mere arrangement was put in and that too subject to the fulfilment of some other happening.

The Supreme Court in Jyoti Brothers v. Shree Durga Mining Co., AIR 1956 Cal. 280, held that "a contract to enter into a contract is not considered to be a valid contract in law at all. However, the same is not conclusive. The court will rely upon the degree of importance of such understanding to the parties based on the fact whether either of them acted in reliance on such Understanding".

For the sake convenience if we substitute the word "MOU" instead of Contract in the light of the first line mentioned by the Supreme Court, mere entering into a an MOU can't be considered to be a valid contract. Even if the court relies upon the degree of importance understanding, the words clearly in the MOU explicitly tell us the non-existence of the intention to create a definitive agreement.

Clause

"Nothing in this Agreement shall constitute, create or give effect or recognize any Joint Venture (JV), partnership or business entity of neither any kind nor any legal claim on each other". The MOU apparently contains the above mentioned clause which says creation of the MOU does not result in any joint venture, partnership etc.

Existence of the said clause would speak about the formation of a full-fledged contract/agreement. Only subject to the happening of another event, the contract along with obligations and rights would come into picture.

Termination Notice

In Royal Orchids vs. Kulbir Singh Kohli & Another it was held by the Delhi High Court that "memorandum of understanding (MOU) in a commercial transaction between private parties is determinable by nature. Therefore, the court held that such a contract can be terminated in the absence of a termination clause and the said MOU was not capable of specific performance".

Also Read:

• The Legal Validity of MOU In India