Memorandum of understanding — is an MoU binding, and the two-part structure that actually settles the question

The heading decides nothing

Start here, because almost every MoU problem begins with the opposite belief.

Indian law has no separate category called “memorandum of understanding”. There is no statute that defines it, no provision that gives it a particular status, and no rule that says a document so headed is unenforceable. What there is, is the Indian Contract Act, 1872, which asks a series of questions about the contents of a document, and answers them the same way whether the first line reads “Agreement”, “Memorandum of Understanding”, “Letter of Intent” or nothing at all.

So the belief that writing “MoU” at the top is a way of getting the comfort of a written record without the commitment of a contract is simply mistaken. And the opposite belief — that an MoU has locked the counterparty in — is equally mistaken when the document leaves the essential terms to be agreed later.

Section 10 — what makes an agreement a contract

Run your document through that sentence, clause by clause, and you will usually know the answer before any lawyer tells you.

Did the parties intend to be bound?

Beyond the statutory ingredients sits a question the Act does not spell out but the courts consistently ask: did these people intend to create legal relations?

In a commercial setting, the ordinary working assumption is that they did. Two businesses do not usually sign a document about money, goods or services as a social courtesy. In a family or social setting, the assumption is weaker and the surrounding circumstances carry more weight.

What the courts look at is the document and the conduct together: how detailed the terms are, whether anything essential was left open, whether the parties began performing, whether money moved, and what they said to each other and to third parties afterwards. An MoU that says it binds nobody, followed by six months of both sides performing it, is a document fighting against its own evidence.

The 1968 ruling on “a formal contract to follow”

The most common sentence in an Indian MoU is some version of “a definitive agreement shall be executed in due course”. Whether that sentence saves you is the question the Supreme Court answered decades ago.

Two practical consequences follow, and they point in opposite directions depending on which side of the table you sit.

• If you want to be bound now, settle every essential term in the MoU and do not hide behind the promise of a formal agreement. The formal agreement then becomes what the Court called “a more formal shape” for something already agreed.
• If you do not want to be bound yet, a passing reference to a future contract is not enough. The document has to make plain that no obligation arises until the definitive agreement is executed — and the parties have to behave accordingly.

Section 29 — how most MoUs actually fail

In practice, the commonest reason an MoU turns out to be worthless is not that somebody cleverly avoided being bound. It is that nobody wrote down anything certain enough to enforce.

Notice the second limb — “or capable of being made certain”. A term does not have to be a number; it has to be reducible to one by a mechanism the document supplies. “At the price determined by a valuer appointed by the parties” is capable of being made certain. “At a mutually agreed price” is not: it is an agreement to agree, which is no agreement at all.

Order an MoU — free, pay after work

The two-part structure

This is the drafting answer, and it is what separates a professionally drawn MoU from the templates circulating online. A good preliminary document has two parts, and it says which is which.

Part one records the commercial understanding — what the parties are contemplating, on what shape of terms — and states expressly that it does not create legally enforceable obligations, and that the parties will be bound only upon execution of a definitive agreement.

Part two is a short, clearly identified set of clauses that are intended to be binding immediately, listed by number so there is no argument about which ones.

That structure does three useful things at once. It gives both sides the written record they wanted. It protects the things that genuinely need protecting during negotiation. And it removes the argument that the whole document was binding, because the document itself demonstrates that the parties knew the difference and made a deliberate choice.

Which clauses should bind anyway

• Confidentiality. You are about to share figures, customer lists, designs or plans. That needs to be protected whether or not the deal happens, and it needs to survive the MoU ending. Where the information is substantial, a separate non-disclosure agreement is better than a clause.
• Exclusivity or standstill. If you are spending money on diligence, you may want the other side off the market for a stated period. This clause has to be binding to be worth anything, and it must have an end date.
• Costs. Each side bears its own, unless agreed otherwise. Cheap to write, expensive to omit when a deal collapses after a valuation and an audit.
• Governing law and jurisdiction. So that the dispute about whether anything was binding is heard somewhere predictable.
• Announcements. Whether either party may say publicly that the discussions are happening. This matters more than people expect for listed companies, tenders and hiring.
• Non-solicitation, sometimes. Where the discussions will expose one side’s key people to the other.

MoU, LOI, term sheet, heads of terms

The column that matters is the last one, and for the first four the honest answer is the same: it depends on what is inside. Choosing the label is a presentational decision. Deciding whether the document binds is a drafting decision, and it has to be made deliberately.

Consideration

Section 25 provides that an agreement made without consideration is void, subject to the exceptions stated there — including an agreement in writing and registered, made on account of natural love and affection between parties standing in a near relation to each other.

For a genuinely preliminary MoU that obliges nobody to do anything, consideration is not an issue because the document is not trying to be a contract. The moment a promise in it is meant to be enforceable, something has to move the other way. In the two-part structure, this is worth checking against the binding clauses specifically: mutual confidentiality and mutual costs provisions are ordinarily fine, because each side is giving something.

Property MoUs — a different risk entirely

A very large share of the MoUs we are asked to look at concern immovable property, and they carry risks the commercial ones do not.

• The document may be an agreement to sell in substance. If it identifies the property, the price and the parties, and records that one will sell and the other will buy, calling it an MoU does not change what it is.
• An advance usually changes the picture. Money paid and received on the strength of the document is powerful evidence that the parties intended to be bound.
• Stamp duty follows the substance. An instrument charged as an agreement when it operates as something else is under-stamped, with the consequences set out below.
• It does not transfer the property. Only a registered conveyance does — we set out why in the mutation guide, which deals with the Supreme Court’s position on documents short of a conveyance.
• Limitation runs. A person holding an agreement relating to property and doing nothing about it for years may find the remedy has gone even though the document has not.

If your document concerns property, tell us at the start. It changes the stamping, possibly the registration, and certainly the drafting. In many cases what the parties actually need is a proper agreement to sell rather than an MoU.

Specific performance after 2018

There is a development here that has made preliminary property documents considerably more consequential than they used to be.

Before 2018, specific performance of a contract — an order compelling a party to actually perform rather than merely pay damages — was a discretionary remedy under the Specific Relief Act, 1963. The court could grant it or not. The 2018 amendment changed the architecture: the Act now provides that specific performance shall be enforced, subject to the limitations and conditions the Act specifies.

So a binding agreement about identified property is no longer a document whose enforcement is a matter of judicial discretion in the old sense. For somebody who signed an “MoU” believing that the worst outcome was returning the advance, that is a material change. And for somebody holding a well-drafted binding agreement, it is a considerably stronger position than it once was.

Stamp duty follows substance, not the title

This is where the heading fails most expensively.

Stamp duty is charged on instruments according to what they do, not what they are called. A document headed “Memorandum of Understanding” that in substance creates a lease is charged as a lease; one that operates as an agreement relating to the sale of property is charged accordingly. The Act looks at the operative clauses.

And the consequence of under-stamping is not a small penalty. An instrument that is not duly stamped cannot be admitted in evidence, acted upon, registered or authenticated, and curing the defect costs the deficiency plus a penalty of up to ten times the shortfall. The whole mechanism — including the one instrument that can never be cured — is in our e-stamp paper guide.

Registration

An ordinary commercial MoU is not registrable and nobody expects it to be. The question only arises where the document creates or declares a right, title or interest in immovable property, and there the Registration Act applies on its own terms regardless of the heading.

The practical point for drafting is that the registration question and the stamping question travel together and are both answered by asking what the document actually does. If the answer is “it records that we are talking”, neither arises. If the answer involves an interest in property, both do.

Who may sign

An MoU is only as good as the authority of the person who signed it, and this is a genuinely common failure.

• A company signs through a person authorised by its board. The counterparty is entitled to ask for the authorisation, and should. Our board resolution guide sets out what a certified true copy must contain.
• An LLP or partnership signs through a designated partner or partner authorised under the agreement or deed.
• A trust or society signs through the office bearers its governing document authorises, and those documents often require more than one signature.
• An individual signing for somebody else needs a power of attorney of the right kind — see our power of attorney guide.

Ask for the authority at the time, not afterwards. A counterparty who is reluctant to produce it is telling you something.

Expiry and survival

The clause most often missing, and the one whose absence causes the quietest damage.

Without an expiry, an exclusivity obligation runs on indefinitely, a party who moved on two years ago is still technically constrained, and nobody can say whether the understanding is alive. State how long it stands — sixty days, ninety days, until a stated date — and what happens if no definitive agreement is signed by then.

Then state what survives. Confidentiality should outlast the MoU, usually by years. Costs and governing law should survive. Exclusivity should not. Listing the surviving clauses by number takes one line and removes an entire category of argument.

Changing it later

Section 62 of the Contract Act deals with the effect of novation, rescission and alteration: if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

So an MoU can be varied by agreement. The practical rules are the ordinary ones: put the variation in writing, have both sides sign it, and include a clause in the MoU itself saying that no variation is effective unless in writing and signed. Oral variations of written documents are among the most reliable sources of litigation there are, because both sides remember the conversation differently and neither is lying.

What a good MoU contains

• The parties, fully identified, with the capacity in which each signs.
• Background — what each party does and why they are talking.
• The purpose — what is being contemplated, in plain terms.
• The commercial understanding, as specific as it honestly is; vagueness dressed up as flexibility helps nobody.
• What each party will do next, and by when.
• Conditions — approvals, diligence, funding — identified, with what happens if one fails.
• The binding-provisions clause, naming the clauses that bind.
• Confidentiality, with a duration.
• Exclusivity, if any, with an end date.
• Costs.
• Term, expiry and survival.
• Variation only in writing.
• Governing law, jurisdiction and notices.
• Signatures on every page, with annexures actually attached and initialled.

Joint ventures and collaborations

The commonest commercial use of an MoU in India is two parties agreeing to do something together — a manufacturer and a distributor, a college and a company, two firms bidding jointly, a landowner and a developer. These are also the MoUs that produce the most litigation, because the parties write down the exciting part and leave out the boring part.

Six questions decide whether a collaboration MoU is worth anything, and a document that answers none of them is a press release rather than an understanding.

• What is each side actually contributing? Money, premises, equipment, people, customers, a brand, a licence. Write it as a schedule with values and dates, not as a sentence beginning “both parties shall contribute”.
• Who owns what is created? Jointly developed designs, software, data, customer lists and brand names need an owner named in advance. “Jointly owned” sounds fair and is usually the worst answer, because neither side can then use it without the other.
• How is money split, and what counts as profit? A ratio is useless without a definition. Gross or net, before or after which costs, and who keeps the books.
• Who decides? Day-to-day decisions, spending above a threshold, and what happens when the two sides disagree. A collaboration between two equals with no tie-breaker is a deadlock waiting for a reason.
• How does it end? Notice, what happens to the joint assets, who keeps the customers, and whether either side may carry on the activity alone afterwards.
• Is this a partnership in law? If two parties carry on a business together and share profits, the arrangement may attract the law of partnership with everything that follows, including liability for each other’s acts. If that is not what you intend, say so — and if it is, our partnership deed guide is the right place to start.

Where the collaboration is substantial, the honest advice is that the MoU should be short and largely non-binding, and the effort should go into the definitive agreement. An MoU that tries to be a joint venture agreement without the detail gives both sides the illusion of protection.

When one party is outside India

Cross-border MoUs are ordinary now — an Indian manufacturer and a foreign buyer, an Indian developer and an overseas client, an institutional tie-up with a university abroad. A few things change, and they change at the drafting stage rather than at the dispute stage.

• Governing law. Say which law applies. A document silent on this leaves the question to conflict-of-laws principles, which is an expensive way to find out.
• Forum. Courts of a named place, or arbitration with a named seat, rules and number of arbitrators. For a cross-border commercial arrangement, arbitration is usually the practical choice because an award travels between countries far better than a judgment does.
• Language. Where the document exists in two languages, state which version prevails. This one line prevents a category of dispute that is very hard to unwind later.
• Currency and payment. Which currency, the exchange rate basis, who bears transfer charges, and what documentation the Indian party’s bank will need for an inward remittance.
• Regulatory approvals. Where the arrangement involves investment, technology transfer or a regulated sector, approvals may be required, and the MoU should say who obtains them and what happens if one is refused.
• Stamping and execution. A document executed abroad and later brought into India raises stamping questions of its own, and signature blocks, attestation and counterparts should be dealt with expressly rather than improvised over email.

The binding-provisions clause matters even more here, because the cost of arguing about whether a preliminary document bound anybody rises sharply once two legal systems are involved. Decide it in the document, in one paragraph, and the question never arises.

If the other side walks away

The sequence is the same whichever kind of document you hold, and the first step is the one people skip.

• Work out what the document actually is. Read it against Section 10 and Section 29 before you decide you have been wronged. A great many people spend money discovering that their MoU was never enforceable.
• Check the surviving clauses. Even a non-binding MoU usually carries binding confidentiality, exclusivity and costs provisions, and those are frequently what was actually breached.
• Gather the record. The document, the correspondence, what each side did on the strength of it, and any money that moved. Conduct is evidence of intention.
• Send a written demand with a deadline, and where that fails a legal notice.
• Take advice on the remedy. Damages, or specific performance where the subject matter supports it. Our directory is free to search and we take no commission.

Where these go wrong

• Believing the heading protects you. It does not. Section 10 asks about contents.
• Believing the heading binds the other side. It does not do that either.
• No binding-provisions clause. The document is then all-or-nothing, and which of the two it is becomes somebody else’s decision.
• Terms left to be agreed. Section 29 makes an agreement to agree void.
• No expiry. Obligations that were meant to last a quarter running for years.
• Nothing said about confidentiality. The one thing you genuinely needed while negotiating.
• Signed by somebody without authority. Ask for the board resolution or the power of attorney at the time.
• Using an MoU for a property deal to save stamp duty. Duty follows substance, so it saves nothing and creates an inadmissible document.
• Acting inconsistently with the document. Saying it binds nobody and then performing it for six months.
• Using an MoU for a family property arrangement. That is a family settlement, with its own requirements.

Time and cost

An MoU is drafted in Same day – 2 days. The question we ask first is the one that decides everything else: do you want this to bind, now, or do you want a record of the discussion with a few protections attached? Both are legitimate. What does not work is not deciding.

If somebody has sent you an MoU to sign, the review is the more valuable service. Most of what this page describes is easier to fix before signature than to argue about afterwards. Nothing is payable in advance — placing the order is free and payment comes after the work is done.