Written by attorney Todd Eric Gallinger

Proper Use of Letter of Intent or Memorandum of Understanding

A memorandum of understanding is an agreement between two parties often used in the course of contract negotiationst. Depending on how it is drafted, it may or may not be fully binding in the way that a contract is. Sometimes, a letter of intent is used instead of a memorandum of understanding. A letter of intent expresses an interest in performing a service or taking part in an activity, but does not legally obligate either party. Common abbreviations of LOI for letter of intent and MOU for a memorandum of understanding.

In some cases, depending on the exact wording, memorandums of understanding can have the binding power of a contract. As a matter of law, contracts do not need to be labeled as such to be legally binding. Whether or not a document constitutes a binding contract depends only on the presence or absence of well-defined legal elements in the text proper of the document (the so-called "four corners"). For example, a binding contract typically must contain mutual consideration: legally enforceable obligations of the parties and its formation must take place free of the so-called real defenses to contract formation (fraud, duress, lack of age or mental capacity, etc.). If a document contains these elements, it is likely to be enforceable even if it is headed "Memorandum of Understanding" or "Letter of Intent."

If an LOI or MOU is intended to be nonbinding, then language within a clause of the agreement should specifically state so. This will most likely prevent a court from enforcing it against one party or the other. To ensure that your letter of intent, memorandum of understanding or other contract is drafted to your requirements, please consult with a business/corporate attorney licensed in your jurisdiction.

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