Module 6

MODULE 6

DRAFTING MOUs AND AGREEMENTS

6.1. INTRODUCTION

• In every business, understanding between the parties is zeroed down to
documentations, which begins with Memorandum of Understanding
(“MoU”).

• MoU precedes 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
relationship.

• 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-

i.offer,

ii.acceptance,

iii.consideration and

iv.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.

6.2. WHAT IS AN AGREEMENT?

According to The Law Dictionary an agreement means, “a concord of
understanding and intention, between two or more parties, with respect to the
effect upon their relative rights and duties, of certain past or future facts or
performances.”

Section 2(e) of the Indian Contract Act defines agreement as, “every promise
or every set of promises that forms the consideration for each other is an
agreement.

6.3. ESSENTIALS OF A VALID AGREEMENT/CONTRACT

OFFER AND ACCEPTANCE
INTENTION TO CREATE LEGAL RELATIONSHIP
CAPACITY TO CONTRACT
FREE CONSENT
LAWFUL OBJECT
CONSIDERATION
CERTAINTY AND POSSIBILITY OF PERFORMANCE
LEGAL FORMALITIES

1. Offer and Acceptance: Basically, a contract unfolds when an offer by one
party is accepted by the other party. The accepted offer should be without any
qualification and be definite. An offer needs to be clear, definite, complete
and final. It should be communicated to the offeree. A proposal when
accepted becomes a promise or agreement. The offer and acceptance must be
‘consensus ad idem’ which means that both the parties must agree on the
same thing in the same sense i.e. identity of wills or uniformity of minds.

2. Intention to Create Legal Relationship: The intention of the parties to a
contract must be to create a legal relationship between them. Agreements of
social nature, as they do not contemplate legal relationship, are not contracts.

For instance, if a father fails to give his daughter the promised pocket money,
the daughter cannot sue the father, because it was purely a domestic
arrangement. Thus, it is clear that all agreements, which do not result in legal
relations, are not contracts.

3. Capacity to Contract: If an agreement is entered between parties who are
competent enough to contract, then the agreement becomes a contract.

4. Genuine and Free Consent: Free consent is another essential element of a
valid contract. An agreement must have been made by free consent of the
parties. The contract would be void in case of mutual mistakes. When
consent is obtained by unfair means, the contract would be voidable.

5. Lawful Object: Objectives of an agreement should be lawful. It must not
be illegal or immoral or opposed to public policy. It is lawful unless it is
forbidden by law. When the object of a contract is not lawful, the contract is
void.

6. Lawful Consideration: Something in return is Consideration. In every
contract, agreement must be supported by consideration. It must be lawful
and real.

7. Certainty and Possibility of Performance: The agreements, in which the
meaning is uncertain or if the agreement is not capable of being made certain,
it is deemed void. T&C of the contract should always be certain and cannot
be vague. Any contract that are uncertain are considered void. The terms of
the agreement must also be capable of performance and should not enforce
impossible act.

8. Legal Formalities: Legal formalities if any required for particular
agreement such as registration, writing, they must be followed. Writing is
essential in order to affect a sale, lease, mortgage, gift of immovable property
etc. Registration is required in such cases and legal formalities in the relevant
legislation should be strictly followed.

6.4. WHAT IS MOU?

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.

6.5. 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 an 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.

6.6. DRAFTING THE MOU AND AGREEMENT

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

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 simple, 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
at least one promise and recognized in law as enforceable

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.

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.

Purpose of MoU
This broadly defines what a 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.

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.

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.

Other Clauses

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.

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.

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.

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.

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.

6.7. DIFFERENCE BETWEEN AGREEMENT AND MOU

BASIS FOR AGREEMENT MEMORANDUM OF
UNDERSTANDING
COMPARISON

MEANING An agreement is a document A Memorandum of

in which two parties agreed Understanding or MoU is

upon to work together for a a legal document which

common objective. describes the terms of an

arrangement between the

two or more parties

forming a bilateral or

multilateral agreement.

ELEMENTS Offer, Acceptance. Offer, Acceptance,

Intention and

consideration.

ENFORCEABILITY An agreement can be A memorandum of
enforceable in the court of understanding cannot be
law. enforceable in the court of
law.

BINDING NATURE Always binding on the It is binding upon the
parties to the agreement. parties, if the
memorandum is signed in
exchange for monetary
consideration.

COLLATERAL Yes no
RIGHTS

FORM Oral or written written

6.8. SIMILARITIES

• Agreement and MOU both consist of an offer as well as an acceptance
to it.

• Both need two or more parties.
• Both need common objective of parties.
• There is a need that the parties must agree on the same thing in the

same manner, i.e. Consensus ad idem.

6.9. CONCLUSION

Every contract or agreement 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.