Remember my post on Memorandums of Understanding? Well, yesterday I discussed Acceptance. Now, let’s bring the two concepts together to help you understand how a memorandum of understanding fits in contract law.

An Agreement to Agree

Letters of Intent (LOI) and Memorandums of Understanding (MOU) are usually not contracts (remember contracts are defined by words or actions, so these two types of documents can be a contract depending on the language).

Why are they not contracts?  Well, generally the language in them is broad and there is only an indication of what the terms might be, as they are still being negotiated.  Therefore, there is only an understanding between the two parties that they would like to agree.  Remember without assent, there is no acceptance, and without acceptance there is no contract.  With LOIs and MOUs there is even a question of what is the offer?

So Why Use Them?

What they are great for is being used as a starting point for a formal contract to be drawn up at a latter date.  In particular, still evolving relationships and situations are good for LOIs and MOUs because both sides recognize the need to be flexible to figure out what they want in a formal agreement.  Furthermore, they know if the business deal does not come through there was no contract to sue each other over. Basically, it was an experiment.

Bottom line: Using LOIs/MOUs as the Basis for Future Agreement

Consider using a LOI or MOU in a situation where you and the other side do not know how the relationship will work.  You can experiment for a while and determine what the important terms will be.  From there you both can negotiate and settle upon a more formal agreement at a latter date.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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