Letter of Understanding Vs. Letter of Intent

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The path to finalizing a contract between two parties may include the singing of either a letter of intent or a letter of understanding, also referred to as a memorandum of understanding. Some negotiations may include both types of agreements. While there are several similarities between these documents, they serve different purposes and aren't always used in the same way.

Business Negotiations, LOIs and MOUs

While business transactions are being negotiated, the signing of letters of intent or memorandums of understanding often are announced in press releases as signs of progress toward the culmination of a deal. These indicate agreements between parties on various aspects of the ongoing negotiations. The number of points that are contractually binding in each format usually will be limited and of a general nature.

Similarities between LOI and MOU

As the negotiations between parties proceed toward the finalization of a business transaction, there often will be agreements on some specific points, while others remain open. Both of these documents can be used to put these interim agreements in writing, either at regular intervals or when negotiations on distinct aspects of the transaction are completed. When signed, these documents have many characteristics of a contract, but the points that are actually binding within the agreement may be limited to standard provisions such as confidentiality, going to arbitration to settle disputes between parties, and other terms common in boilerplate language.

Key Differences

There are two primary differences between an MOU and an LOI. The first is that the language in an MOU may apply to negotiated terms that have been agreed upon by more than two parties, while terms in an LOI will refer to only two parties. The second is that the terms, actions, and conditions listed in an MOU are signed off by all parties that are in agreement. An LOI, on the other hand, will list the terms, actions, and conditions that have been agreed upon by both parties, but is signed only by the party that forwarded the initial proposal.

Uses of LOIs and MOUs

LOIs are commonly used to define the points that have been agreed between a buyer and a seller prior to finalizing the deal with a contract signed by both parties. This step in the negotiation can move the process forward by listing the aspects of the deal that have been prioritized to keep both parties on the same page, while smaller details and fine print continue to be discussed. MOUs are used to define the parameters under which parties in agreement will work together, which is often in the form of a joint venture or partnership. Like an LOI, this document will list the most important aspects of the agreement prior to the signing of the final contract.


About the Author

After working for 21 years as a licensed adviser specializing in corporate and private finance, Scott Krohn began his writing career in 2008 covering a variety of topics including business, personal finance, health, and IT. He graduated from Cal State University, Long Beach with Bachelor of Arts degree.

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