Sunday, January 29, 2017

How to Draft a Letter of Intent (Memorandum of Understanding)

Letter of Intent and Memorandum of Understanding are two different titles for the same type of document. Therefore, I will use the two terms (LOI & MOU) interchangeably in this article.

What Is an LOU/MOU?

MOUs indicate an intended common line of action. It is a more formal alternative to a handshake, a gentlemen's agreement. MOU is appropriate in cases when parties either do not imply a legal commitment or in situations where the parties cannot create a legally enforceable agreement. An MOU can also help to make the arrangement clearer to the parties so as to speed up the process of negotiation in relation to the agreement.

LOUs look like contracts but the major difference is that the former are usually not binding, although they can contain some binding provisions (e.g., confidentiality).
However, the more detailed and complex the LOU, the higher the likelihood that the court will interpret it to be a binding contract.


Common purposes of an LOI are:

- To memoralize basic terms before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters.
- To declare officially that the parties are currently negotiating
- To provide benchmarks for future negotiations

Drafting Tips

To avoid confusion and ensure that everybody is on the same page, state in the LOI whether it is binding or not. Or, if only some provisions are binding, state which ones. If you want a completely binding document, then title it AGREEMENT, not an MOU/LOI.

Simple English. The more legaleze, the higher the likelihood that the MOU will be interpreted as a binding contract. If you don’t want a binding MOU, avoid provisions regarding modification, termination.

State the purpose of the MOU. Outline the agreed upon roles and responsibilities of each party. The roles and responsibilities should align with project goals, objectives and target outputs.  Identify the staff responsible for completing the specific responsibilities. Describe how the collaboration/partnership benefits the project.Describe the resources each party is expected contribute to the project.

Include obligation to negotiate in good faith.  Even though MOUs are normally not binding, it is an unacceptable practice to sign an MOU that you have no intention of implementing.

State that the parties will negotiate definitive agreements later. E.g.,

Preparation of Definitive Agreements. The parties will negotiate the terms and begin preparation of the Definitive Agreements that will govern the proposed deal. To the extent appropriate for transactions of this type and size, the Definitive Agreements will contain customary representations, warranties, covenants, indemnities, and other agreements of the parties. The Definitive Agreements are expected to include, without limitation: (1) a service agreement, (2) a non-compete agreement, (3) a confidentiality agreement and (5) any other agreements necessary or desirable in connection with any of the foregoing arrangements or any transaction contemplated herein.