Letter of Intent (Memorandum of Understanding)

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What is it?

A negotiation may reach a stage where parties are not ready to sign a contract but they want to have a summary of what has been discussed regarding what the future contract will be like. A Letter of Intent (Memorandum of Understanding) can be useful in this situation.

A Letter of Intent (Memorandum of Understanding) is a non-binding document to summarise the result of negotiations between two parties in order to facilitate the future formation of a contract. It is a memo containing information such as the main content of the future contract and the time when the contract will be signed. However, it also contains some binding terms for how the further negotiations should be conducted.

Why do you need it?

A Letter of Intent (Memorandum of Understanding) serves as a record of the progress of initial negotiations and can be used to help parties focus on issues that need resolution.

If negotiations have been going on for some time, you may want to put a Letter of Intent (Memorandum of Understanding) in place to give a "no shop" or exclusivity period where the parties are precluded from negotiating with other parties until your negotiations are finalised or terminated.

The fact that a Letter of Intent (Memorandum of Understanding) exists, although not legally binding, can have the effect of pushing forward negotiations and "binding" the parties for non-legal reasons, such as psychological and moral/professional commitment of the parties, damage to future dealings between the parties if negotiations are not carried out in good faith, and damage to the "breaching" party's reputation in their industry.

Key clauses to watch for:

When drafting a Letter of Intent (Memorandum of Understanding), it is important to focus on a number of key clauses, in particular:

  • Confirmation that the terms of the letter are not legally binding (except where specified);
  • Purpose of the agreement that is intended to be reached by the parties;
  • Key terms that have been agreed so far;
  • "No shop" or exclusivity period against negotiations with other parties;
  • Deadline for a final agreement to be reached;
  • How to terminate negotiations and actions required on termination, such as return of equipment, information, and data;
  • Binding clauses, such as confidentiality requirements;
  • Obligation to negotiate in good faith; and
  • How costs of the proposed agreement are to be paid.

Letter of Intent (Memorandum of Understanding) Document