Letter of Intent vs. a Memorandum of Understanding: An Overview
A letter of intent is likely to encompass a number of different aspects and it varies in length according to the level of specificity and the type of transaction. All letters of intent lay out the basics of a deal, including cost, time frame, and contingencies. Like a letter of intent, a memorandum of understanding (MOU) instead outlines an agreement between two or more parties and is usually produced before a final, formal contract.
Key Takeaways
- A letter of intent is a document declaring the preliminary commitment of one party to do business with another.
- A memorandum of understanding (MOU) is a document that describes the broad outlines of an agreement that two or more parties have reached.
- The primary difference between the two is that a letter of intent is not binding, whereas a memorandum of understanding is considered binding and carries weight in a court of law.
Letter of Intent
A letter of intent is a document, often used in mergers and acquisitions, that records the preliminary terms of an agreement. Though the letter of intent is nonbinding, it is an important outline of the key terms that the parties involved in the transaction have agreed upon.
Ultimately, the information recorded in the letter of intent forms part of the definitive purchase agreement that legally sets out the transaction;it outlines what you can and can't talk about outside of that negotiation, and it provides a roadmap that describes how things will proceed.
Memorandum of Understanding
A memorandum of understanding(MOU) is anagreement between two or more parties outlining the terms and details of an understanding, including each party'srequirements and responsibilities. It is often the first stage in the formation of a formal contractand does not involve the exchange of money.
Either document likely identifies any terms that need to resolve before completing the deal. The document also usually addresses the time frames and deadlines for the transaction, the price, and the method of payment. Other aspects that may be included in the letter of intent or memorandum of understanding include warranties of marketable title, a list of total liabilities and total assets, and operating condition of all equipment and machinery at the time of purchase.
The letter of intent or memorandum of understanding may outline stipulations for the operation of the business until the date that business is sold. A drop-dead date is an important clause; this is a point in time when the parties agree to discontinue negotiations if they haven't reached an agreement.
The Bottom Line: What the Law Says
Under U.S. law, an MOU is often the same as aletter of intent. In fact, arguably a memorandum of understanding, a memorandum of agreement, and a letter of intent are virtually indistinguishable based on American case law. All communicate an agreement on a mutually beneficial goal and a desire to see it through to completion.
MOUs communicate the mutually accepted expectations of the people, organizations, orgovernmentsinvolved. They are most often used in international relations because, unlike treaties, they can be produced relatively quickly and in secret. They also are in use in many U.S. and state government agencies, particularly when major contracts are in the planning stages.
FAQs
A memorandum of understanding (MOU) is a document that describes the broad outlines of an agreement that two or more parties have reached. The primary difference between the two is that a letter of intent is not binding, whereas a memorandum of understanding is considered binding and carries weight in a court of law.
What is the difference between letter of intent and memorandum of understanding? ›
A memorandum of understanding is defined as a document that describes the broad outlines of the agreement between two parties. A letter of intent is defined as a piece of paper that declares the preliminary commitment of two parties to do business together.
What is the difference between LoI and LOA? ›
In summary, an LOI is a preliminary document expressing the intention to negotiate and potentially enter into an agreement, while an LOA is a formal document accepting an offer and establishing a binding commitment to proceed with the agreed terms.
What is the difference between Lou and MOU? ›
An MoU can be used to outline agreements between multiple parties while an LoI is only applicable for two. The other difference is that an MoU is signed by all parties mentioned and involved in the agreement while the LoI is only signed by the side that originally created the form and forwarded it to the other side.
What is the difference between a letter of agreement and a memorandum of understanding? ›
An agreement is a formal contract that is legally binding and can be enforced in court, while an MOU is a non-binding document that outlines the general terms and understanding of a relationship.
What are three 3 differences between letters and memos? ›
A memo is usually informal, short, concise, and to the point. A letter is a message that is sent to convey information. It can be short or long, and there are many types: thank you letters, personal letters, and business letters. Letters are used beyond the scope of an organization.
Can a memorandum of understanding be legally binding? ›
A memorandum of understanding (MOU) is a legal document but it is not necessarily legally binding, although it usually signals a contract is imminent. The specific intent and language of the agreement will determine whether it is actually binding or not.
What makes an LOI binding? ›
A court relies on two factors when determining if a letter of intent is binding: written expressions of intent present in the letter and demonstrative actions taken by both parties after the letter of intent is signed. If the letter is treated as a contract, it could be ruled binding.
What is the purpose of an LOI? ›
A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. The letter outlines the chief terms of a prospective deal. Commonly used in major business transactions, LOIs are similar in content to term sheets.
Does an LOI need to be signed? ›
Once an LOI is used as a matter of documenting the mutual obligations in an agreement, signing is a way to establish the level of agreement at a certain moment. Signing is always a way to show the other party that you're serious. In most cases, however, there is no need for an elevated demonstration of seriousness.
A memorandum of understanding, or MOU, is a nonbinding agreement that states each party's intentions to take action, conduct a business transaction, or form a new partnership. This type of agreement may also be referred to as a letter of intent (LOI) or memorandum of agreement (MOA).
What is an example of a memorandum of intent? ›
For example, if two companies are considering a merger, they may create a memorandum of intent to outline the terms of the potential agreement. This document would include details such as the proposed purchase price, the timeline for the merger, and any other important information.
What is another name for a memorandum of understanding? ›
a memorandum of agreement. A memorandum of agreement, or MOA, is an alternate term for memorandum of understanding. They are essentially the same kind of document that expresses a mutual understanding between two or more companies, government agencies or other parties.
What are the disadvantages of MOU? ›
Disadvantages of MoU
- Not Legally Enforceable. The memorandum of understanding is a nonbinding agreement, which means neither party is liable to suffer all the consequences for not following the agreed terms and conditions. ...
- Can Be Confusing. ...
- Add to the Negotiation Time.
MOUs tend to be used for simple common-cause agreements which are not legally binding. MOAs, on the other hand, establish common legal terms that establish a “conditional agreement” where the transfer of funds for services are anticipated.
Does an MOU need to be signed? ›
The MOU must be signed by all partners.
When should a memorandum of understanding be used? ›
A MEMORANDUM OF UNDERSTANDING should be used when you submit a request for application involving a collaborative partner(s) that agrees to provide a non-financial exchange that will enhance the project. Examples include: a work station for an out-stationed advocate or training for staff/volunteers.
What is letter of intent understanding? ›
A letter of intent can build trust between the parties involved by establishing a mutual understanding and a shared vision for the transaction. They can also expedite the completion of a transaction by outlining the terms and expectations from the onset, thus streamlining the negotiation and execution process.
What comes after an LOI? ›
Due Diligence and Purchase Agreement
Once the LOI is signed, the next steps are to negotiate the purchase agreement and perform due diligence.
