LOI (Letter of Intent) and MOU (Memorandum of Understanding) are largely similar in nature and are often confused with one another. Thus, it is important to understand the difference between LOI and MOU clearly. Both LOI and MOU are heavily used in transactions of personal and business nature. The key difference between LOI and MOU is that LOI is an agreement that outlines the main points of proposed deal and serves as an “agreement to agree” between two parties whereas MOU is an agreement between two or more parties to undertake a specific task or project. Both agreements do not intend a legal enforcement between the parties.
CONTENTS
1. Overview and Key Difference
2. What is LOI
3. What is MOU
4. Side by Side Comparison – LOI vs MOU
5. Summary
What is LOI?
LOI is an agreement that outlines the main points of a proposed deal and serves as an “agreement to agree” between two parties. LOI is also referred to as a Letter of Inquiry or a Concept Paper. Only two parties can be involved in an LOI; thus, LOI cannot be formed between more than two parties. LOI is often considered as a primary agreement drafted prior to entering into a written contract; therefore, it is not legally binding. However, many of these agreements contain provisions that are binding, such as non-disclosure, exclusivity and non-compete agreements.
Contents of LOI
LOI takes the format of a formal letter, and the following contents should be included,
- Summary statement (opening paragraph)
- Statement of the issue
- An overview of the activities to be implemented and how they should be implemented
- Outcomes of the activity
- Budget and other relevant financial information
- Closing paragraph
- Signature of the parties involved
A letter of intent is generally presented by one party to another party and subsequently negotiated before execution or signature. Here, both parties will attempt to secure each other’s positions. If carefully negotiated, an LOI may serve to protect both parties in a transaction. The level of negotiation may increase depending on the nature of the project involved. For instance, LOIs are heavily used in corporate actions such as mergers, acquisition and joint ventures prior to entering into a formal written contract. In such an instance, LOI provides a credible basis for verification and negotiation of terms before entering into a legally binding contract.
What is MOU?
MOU is a written agreement where the agreement terms are clearly defined and agreed upon with the objectives intended to achieve. But it is not a legal enforcement between the parties. MOUs are often first steps towards legally binding contracts. MOU may state that the parties “agree to promote and support the joint use of facilities”, but this does not amount to a legally binding clause.
E.g. In 2010, Royal Dutch Shell, one of Europe’s largest energy groups, entered into an MOU to establish a $12billion joint venture with Cosan, a large Brazilian sugar cane processor.
Unlike in LOI, more than two parties can hold signatories to an MOU. Thus, this type of agreement can be developed among more than two parties. Even though an MOU is not legally enforceable, it is ‘bind by estoppel’. This is a clause that precludes a person from asserting a fact or a right, or prevents him or her from denying a fact. Therefore, if either party does not oblige the terms of the MOU, and the other party has suffered a loss. As a result, the affected party has the right to cover the losses. Similar to LOI, MOU may also include legally binding clauses.
Contents of MOU
The following elements are usually included in an MOU.
- Parties involved in the MOU
- Purpose of entering into the MOU
- Roles and responsibilities of each party involved
- Resources contributed by each partner
- Assessment of the intended benefits by each party
- Signature of the parties involved
Figure 01: Format of an MOU
What is the difference between LOI and MOU?
LOI vs MOU |
|
| LOI is an agreement that outlines the main points of proposed deal and serves as an “agreement to agree” between two parties. | MOU is an agreement between two or more parties where MOU does not intend a legal enforcement between the parties. |
| Parties Involved | |
| Only two parties can be involved in an LOI. | More than two parties can enter into an MOU. |
| Usage | |
| LOI is often converted into a contract later, thus have limited use. | MOU often continue to stay at its form until the completion of the task or project. |
Summary- LOI vs MOU
Both types of agreements describe the intention of taking a specific action and are not legally binding documents even though they may include legally binding clauses. The difference between LOI and MOU mainly depends on the discretion of the parties involved and the nature of the project in concern; LOI is more suitable to use as a primary agreement in major alliances such as mergers and acquisitions where a steady platform for negotiation is necessary whereas MOU may be more suitable to use as an alternative to a contract.
Reference:
1. Cueto, Santiago A. “Memorandum of Understanding and Letter of Intent: What’s the Difference?” International Business Law Advisor. N.p., 21 Apr. 2010. Web. 24 Apr. 2017.
2. “Corporate and Foundation Relations.” Guidelines for a Letter of Intent | Corporate and Foundation Relations | UMass Amherst. N.p., n.d. Web. 24 Apr. 2017.
3. Todd Eric Gallinger Business Attorney California free consultation Message Reveal Number949-862-0010. “Proper Use of Letter of Intent or Memorandum of Understanding.” Proper Use of Letter of Intent or Memorandum – Guides – Avvo. N.p., 21 July 2010. Web. 24 Apr. 2017.
Image Courtesy:
1. “Memorandum of understanding between Argentina and Iran” By Argentina and Iran – AlbertoNisman.org (Public Domain) via Commons Wikimedia