Letter of Intent (LOI) and Memorandum of Understanding (MOU)

Definitions
Letter of Intent- A letter of intent (LOI) is a document declaring the preliminary commitment
of one party to do business with another. The letter outlines the chief terms of a prospective
deal. Commonly used in major business transactions, LOIs are similar in content to term
sheets. One major difference between the two, though, is that LOIs are presented in letter
formats, while term sheets are listicle in nature.
LOI can be used any types of deals-
 A lease agreement
 The purchase and sale of property
 The purchase and sale of the stock and assets of the business

LOI contains specific information like-

 Identification of the parties
 Financial terms
 Financing specifics
 A closing dates
 Identification of property or business that is the subject to transaction
 Parameters for a study period or required information for due diligence

Memorandum of Understanding- A memorandum of understanding (MOU) is a type of

agreement between two (bilateral) or more (multilateral) parties. It expresses a convergence
of will between the parties, indicating an intended common line of action. It is often used
either in cases where parties do not imply a legal commitment or in situations where the
parties cannot create a legally enforceable agreement. It is a more formal alternative to a
gentlemen's agreement.
Essentials of MOU-
 Name of the parties involved
 Purpose of entering
 Roles and responsibilities
 Terms and conditions
 Project goals and key services to be provided
 Resources contributed by each party
 Signature of all the parties involved
Differences between LOI and MOU
Basis LOI MOU
Nature of Two parties are involved More than two parties involved
Parties
Binding or May or may not be binding but It binds and carries weight for the court
not it carries lower weigh in the of law
court of law
Legal Carries low weightage Legally enforceable and carries
Enforceability weightage
Signatories It will list terms, actions and The terms, actions and conditions listed
conditions that have been are signed by all the parties that are in
agreed upon by both the agreement.
parties.
Continuances Often converted into contract Often continue to stay as is form until
later thus have limited use. the completion of task or project.

Common law systems and Civil law systems- how are they treated?
Understanding of LOI and MOU in Common Law
 No party is exposed to any liability during the period of negotiation but only after
execution of return contract.
 If the contract states that it is non-binding then the document would not be
considered under the regulations.
 LOI and MOU may be considered binding if minutes of meetings has occurred before
it.
 It is not considered to be binding if the parties continues to negotiate essential terms
of agreement

Understanding of LOI and MOU in Civil Law

 It is totally opposite in case of liability. If negotiation has started but no contract is
concluded, still party causing the failure is responsible for the damages or
compensation.
 LOI and MOU are supposed to be under good faith dealing hence the victim party can
take legal actions against the particular party.
 Extreme care is to be taken during finalizing terms of negotiation and commitment.
 Even if the document states that it is non-binding still the good faith law (article 42)
applies.