A letter of intent (LOI) or Memorandum of Understanding (MOU) is used for establishing the intentions or mutual understanding between two or more parties concerning their forthcoming main agreement. It is a pre-agreement; a document reflecting the parties’ intentions and (partly) non-binding commitments may be equally called a “Letter of Intent” (also commonly referred to as an “LOI”), “Memorandum of Understanding” (or “MOU”), “Heads of Agreement” or “Term Sheet”, depending on industry practice and on the parties’ preference to express a binding or less-binding commitment.
Why using a letter of intent (LOI)?
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When is a Letter of Intent useful? There may be many reasons for using a letter of intent (LOI), for example:
- The transaction is too complex or too large to negotiate in one single phase;
- The parties are not yet aligned on the structure or nature of a transaction (i.e. crucial deal elements remain to be determined);
- Discussions may have reached a stage where outlining a number of mutually acceptable principles and procedures is possible; or
- Certain binding obligations can only be agreed on after preliminary hurdles are overcome, certain milestones have been achieved, or if a prototype has been delivered and accepted.
In particular, an agreement concerning a contractual alliance, a (corporate) joint venture or the manufacturing of a complex product may well be preceded by an MOU. But typically, a (very) large transaction is often also preceded by a letter of intent: it helps shaping the negotiations, by first straighten the main (intended or desired) course of action of such transaction. The Model letter of intent of sample MOU or LOI shared by us on this website can be particularly useful in the context of such transaction.
Letter of Intent – How to avoid binding obligations #
Most (if not all) MOU’s are intended to be non-binding, with a limited number of binding terms. The applicable law, however, may impose liability on a party if it terminates negotiations that have become somewhat binding (or if a party could, in good faith, reasonably anticipate that a contract would result from the negotiations). The party terminating such negotiations in bad faith can be held liable for damages vis-à-vis the other party (‘precontractual liability’). This liability may stem from a document such as an LOI or MOU if it contains binding, unconditional obligations.
The extent to which the terms or conditions in MOU’s are binding or non-binding depends on a number of factors. You can make a letter of intent non-binding by being express and clear on:
- conditions or requirements set out in the sample LOI (see Article 2);
- whether the commitments are dependent on:
- permits or clearances (see paragraph 2.1.1 of the model LOI),
- funding or subsidies (see paragraph 2.1.2 of the model LOI),
- a satisfactory outcome of further investigations (see paragraph 2.1.3 of the Letter of Intent example),
- “subject to contract” (such as a Definitive Agreement – see paragraph 2.1.5 of the MOU) or “subject to approval” (see paragraph 2.1.4 of the MOU);
- whether certain (crucial) terms or conditions are specifically mentioned to be pending negotiations and subject to prior agreement (see Section 3.1 of the MOU); and
- generally, also considering other circumstances, the binding wording of the provisions in the MOU.
Letter of intent as a roadmap #
Negotiation time schedule and action list. A letter of intent or MOU (such as the sample template letter of intent shared by Weagree) will often also contains provisions addressing the anticipated procedure for negotiations:
- a time-table with deadlines (e.g. for delivering (first draft) contracts, specifications or factual details – Article 4 of the MOU); and
- optionally, a period of time during which the parties will negotiate on an exclusive basis (Article 5 of the MOU).
