Refusal to sign joint venture agreement
Querist :
Anonymous
(Querist) 16 October 2011
This query is : Resolved
MOU was signed between the Govt and one pvt company for doing a joint venture business. but after the business was started and also came to learn that the prospect of their business is good, the pvt. company refused to sign the joint venture agreement as already agreed in their MOU... what will be the consequences and on what ground and law the Govt will sue the pvt company..is there any locus standi for the Govt?
ajay sethi
(Expert) 16 October 2011
we are not respeonding to commercial queries . you can engage a lawyer and take his opinion .
Raj Kumar Makkad
(Expert) 16 October 2011
As MOU had been signed and thus Govt. lost other desirous parties to come forward and complete its joint venture and now this company has refused to sign joint venture agreement then Gov. has definitely got a cause of action to recover damages from such defaulting company. Security of such company may also be forfeited, if already deposited.
prabhakar singh
(Expert) 16 October 2011
Although i also share the view expressed by Mr.Sethi but since one of expert has taken up your cause to speak about,i prefer to express myself too.
MOU as the term popularly used for 'memorandum of understanding'so it is certainly not an agreement but utmost it can in other words be stretched to be called as'gentleman's agreement'
To understand its 'binding or not binding nature'a deeper probe may be required.No doubt, it embodies understanding of the parties in principle, however all understandings do not mature in contracts
or in other words may not result in conferring of rights and imposition of duties and as such can not be enforced by the legal process.
It would be appropriate at this juncture to look into the provisions of Indian Contract Act 1872 and more particularly towards section 10 of the Act.There under elements required for a legally binding contract may be as follows:
a) There must be offer from one party and its acceptance by another,
b) Consent of the parties must be free,
c) Parties must be competent to contract,
d) There must be lawful consideration,
e) There must be lawful object.
f) There must be intention to create legal relations
Thus in a pure and simple MOU, there may be offer and acceptance among competent parties with their free consent and object may also be lawful but still no binding relationship is created or come in to existence because when it is tested on the touchstone of above ingredients it emerges that MOU lacks consideration and intention to create legal relationship.
The statements contained in an MOU may have some affect in law, but its exact
nature depends on whether these are mere representations and understandings or in the nature of binding terms and conditions. The difference between MOU and a contract is a difference of “should” and “shall” i.e. in contract obligations are created by using the word "shall" whereas in MOU parties agree that they " should" do a particular thing reflecting their solemn desire to do so. A contract deals with agreement in reality which is to
be acted upon whereas MOU is an agreement in principle falling short of taking any
action and leaving it to the sweet will of the parties.
In AIR 1985 S.C.1293 the Supreme Court laid down as under:-
"It is true that the nomenclature and description given to a contract is not determinative of the real nature of the document or of the transaction thereunder. These, however, have to be determined from all the terms and clauses of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses."
To sum up when parties enter into MOU incorporating their understanding with a clause to negotiate and execute a formal detailed agreement in future. Such an understanding lacks consideration and intention to create legal relations. The effect of such stipulation also depends on its purpose. One possibility is that the agreement is regarded by the parties as incomplete ,or as not intended to be legally binding until the terms of the formal document are agreed and the document is duly executed in accordance with the terms of the preliminary agreement which may be termed as Memorandum of Understanding.On the other hand,
parties may embody all the essential terms and only details are left to formal agreement to be executed in future. In this situation since the agreement contains all the essential elements and if acted upon by the parties is capable of independent existence and therefore to be given effect. Therefore, terms of the first document are the determining factor to decide the question whether signing of a formal contract is a condition precedent or not?
The fact of continuation of negotiation and preparation of subsequent agreement may be
evidence that the previous negotiations did not amount to an agreement but this test is not conclusive.
Devajyoti Barman
(Expert) 18 October 2011
The Govt can definitely take recourse under Indian Contract Act.
The agreement can both be verbal and in writing. In the instant case it is verbal and can well be enforced in the court iof law though a bit difficult ton prove.
