A Memorandum of Understanding (MoU), or a Letter of Understanding (LoU) contract, explains an agreement made between two or more parties.3 min read updated on February 01, 2023
A Memorandum of Understanding (MoU), or a Letter of Understanding (LoU) contract, explains an agreement made between two or more parties. It outlines the understanding all sides have regarding a specific situation. Think of it as a formal version of a gentlemen's agreement. An MoU states specific roles, responsibilities, and compensation of all involved parties and must include:
- The names and signatures of all parties involved.
- What the project is and its objectives.
- A summary of terms.
These are especially common in transnational agreements. An MoU can be considered confidential, while a treaty is typically not able to be.
Memorandum of Understanding vs. an Agreement
An MoU does not have the same legal weight of a contract, so creating a comprehensive agreement with clear wording and terms spelled out is important in ensuring an MoU will be enforceable. "MoU" is also occasionally used to refer to a Letter of Intent (LoI). An LoI can let the other party know you are interested in being part of an agreement or activity, but does not legally require you to participate.
Implementing an MoU in Transnational Situations
Unlike more formal contracts or treaties, an MoU can usually be established internationally without approval from lawmaking branches of government. Many internal agreements are MoUs, as they take less time to implement and are easier to modify if necessary. Some examples of MoUs are:
Writing an MoU
An MoU can be as simple or detailed as both parties want in order to feel comfortable with the deal. This can consist of an email from one party explaining the deal, then the other party replying to the email in agreement.
Contracts can sometimes be viewed as intimidating. In this case, individuals or organizations may be more inclined to enter into an MoU as opposed to a legal document when talking about using space or sharing information.
The Legality of an MoU
Generally, an MoU cannot be legally enforced due to its simplicity, which makes it hard for any misunderstandings to be resolved if they occur. However, an MoU can provide guidance already agreed upon while a more formal and legal contract is being created. This saves time and money during final contract negotiations.
Business Negotiations and MoUs
During negotiations for a business transaction, MoUs (or LoUs) are shared in press releases as a sign that the parties have officially entered into negotiations.
MoUs and LoIs are similar in that they both outline specific agreements all parties have agreed upon, including confidentiality and agreeing to arbitration in case of disagreements. These can be modified as needed during the negotiation process.
While similar in some ways, MoUs and LoIs do have some important differences. 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.
When to Use LoIs and MoUs
During a transaction between a buyer and seller, an LoI can outline agreed-upon points prior to a formal contract being signed. This allows negotiations to continue once the main points have been identified and agreed upon while the fine print is being worked out.
When multiple parties are planning to work together on a larger venture, an MoU can outline the main points of the agreement before all parties sign the final legal contract, including the smaller details that can take time to finalize.
Sample Letters of Understanding
While MoUs and LoIs do not have the same legal consequence as formal contracts, using a template can make your document look more professional. MoU and LoI templates can be found on several internet sites, including UpCounsel.
If you need help with a Letter of Understanding Contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
FAQs
A memorandum of understanding is an agreement between two or more parties outlined in a formal document. It is not necessarily legally binding, which depends on the signatories' intent and the language in the agreement, but signals the willingness of the parties to move forward with a contract.
What should be in a letter of understanding? ›
Some key features will always be included in a memorandum of understanding, even though each MOU differs. This includes the names of the parties involved, the details of the project on which they are agreeing, the full scope of the project, and the individual roles and responsibilities.
What does the letter of understanding mean? ›
A Letter of Understanding (LOU) is a formal text that sums up the terms of an undertakings of a contract which may have been negotiated up to this point only in spoken form or otherwise informally.
What is the difference between a memorandum of understanding and a letter of agreement? ›
An agreement usually includes detailed and specific terms and conditions, and may require signatures and/or seals, whereas a memorandum of understanding (MOU) typically includes a broad understanding of the parties' relationship, and may not require signatures or seals.
Can a memorandum of understanding be legally binding? ›
MOUs are not legally binding, but serve to document each collaborator's expectations or intentions. The Office of Regulatory Affairs and Research Compliance is responsible for reviewing, negotiating and approving the draft MOU before final approval by the Dean.
Is a letter of understanding a contract? ›
Similar to a contract, a memorandum of understanding is an agreement between two or more parties. Unlike a contract, however, an MOU need not contain legally enforceable promises. While the parties to a contract must intend to create a legally binding agreement, the parties to an MOU may intend otherwise.
What are the disadvantages of an MOU? ›
Lack of legal enforceability: The primary drawback of a MoU is its lack of legal enforceability. While it outlines the intent and commitment of the parties, it may not provide sufficient legal recourse in the event of a breach.
Is the LOI legally binding? ›
What is a letter of intent? A letter of intent (LOI ) is a document drawn up when two parties come to a mutual agreement, but haven't worked out all the details yet. This letter is presented before the finalized legal agreement, which means that a letter of intent is not legally binding.
Can you terminate a memorandum of understanding? ›
Additionally, an MOU will not form a complete agreement unless it satisfies all the fundamental legal requirements of a contract. If it's not legally binding, either party can terminate a memorandum of understanding by notifying the other party.
What is the difference between a contract and an LOI? ›
Key differences between an LOI and a formal contract: - Legally binding: As mentioned, an LOI is not legally binding, while a formal contract is. - Scope: An LOI is generally much less detailed than a formal contract, and may only cover the most basic terms of a deal.
Is a Letter of Agreement the same as a normal contract? A Letter of Agreement is still a formal legally binding document, acting exactly like a contract.
How do you write a simple memorandum of understanding? ›
Every memorandum of understanding template will be slightly different, but there are a few basic elements that you should include.
- The organisations involved in the partnership.
- Beginning and ending dates of the agreement.
- Context or reasoning behind your agreement.
- Names and contact details of the key individuals involved.
A memorandum of understanding is an agreement between two or more parties outlined in a formal document. It is not necessarily legally binding, which depends on the signatories' intent and the language in the agreement, but signals the willingness of the parties to move forward with a contract.
What is the purpose of a memorandum of understanding? ›
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 another name for a memorandum of understanding? ›
In U.S. law, a memorandum of understanding is synonymous with a letter of intent, such as those used by managed service providers.
How powerful is a memorandum of agreement? ›
An MOU is similar to a handshake, where the integrity of both parties is the only binding force involved. The MOU is usually a good first step to a legal agreement, but in and of itself is not legally binding. However, there are cases in which a clause within the MOU renders it legally binding.
What should be included in a meaningful letter? ›
Set a tone or intention for your message
Or you know they are going through a difficult period in their life and you want to cheer them up. Your letter should be lighthearted. Write something that will make the recipient smile. Recount a favorite memory, or remind them why they mean so much to you.
What are the contents of a memorandum of understanding? ›
Contents of an MOU
It names the parties, describes the project on which they are agreeing, defines its scope, and details each party's roles and responsibilities. While not always legally enforceable, an MOU is a significant step because of the time and effort involved in negotiating and drafting an effective document.
What should be clearly mentioned in the letter? ›
The first paragraph should be aimed at introducing yourself and stating the purpose of your letter. The second paragraph should furnish all the information about the matter. The third paragraph can be a concluding paragraph where you lay out your expectations regarding the matter.
How do you end a letter of understanding? ›
Whether you're using a letter agreement or an MOU, you would end the documents with a statement that your signatures indicate your intention to be bound by the terms outlined above, and each party would sign and date the agreement or MOU.
