MOU, Letter of Intent and Heads of Terms

A. Memorandum of Understanding (MOU), Letter of Intent , and Heads of Terms


A memorandum of understanding, a Letter of Intent, and Heads of Terms are very similar documents.  They are both documents outlining the understanding between two or more parties with a clear intention of taking a common course of action. Generally, the parties do not have a legal commitment, but it is the understanding of the parties that a legally binding document will be formally agreed upon in the future. The main difference between the three documents is in the forms, with one being in the form of a memorandum, the second being in letter form, and the Heads of Terms being a simple contract. Both are more formal documents than merely a gentleman's agreement.


Examples of MOUs and Letters of Intent


These documents are normally used when there is a meeting of the minds and a willingness to advance the contract, but it will take some time to negotiate and finalise the final documentation. For Examples, high-risk international transactions such as mergers and acquisitions; property transactions, joint ventures, and other cooperation agreements.


B. Legality of an MOU / Letter of Intent


1. Not legally binding


As mentioned above, MOUs and letters of intent are generally not intended to be legally binding with an understanding that a legal relationship will be formally established in the future. However, they may still contain certain binding provisions, such as confidentiality, applicable law, exclusivity, non-solicitation, or good faith negotiations, which the parties will have to abide by. One should be careful not to make the MOU or letter or intent too similar to a formal contract and ensure that there is a clear disclaimer to state that it is not intended to be legally binding. Otherwise, the court may interpret the document as a provisional agreement that is binding on the parties.


2. Negotiation of the formal contract


Generally, MOUs and letters of intent are a good starting point for negotiations. They are also known as heads of terms and they can help to define the scope and purpose of the negotiations. They convey principles and expectations that are mutually accepted by the parties prior to the negotiations, which are helpful to the lawyers in planning the major contracts to be executed. Typically they would name the parties, describe the items they agree on, define their scope, and detail the roles and responsibilities of the parties.


MOUs and Letters of intent help the parties to reach a mutual understanding of what is most important to themselves and the other parties before moving forward. The parties normally begin by stating (i) their respective expectations from the relationship and the ideal outcomes; (ii) their respective contributions to the relationship; and (iii) major issues to be negotiated.


C. Disadvantages of an MOU / Letter of Intent


Diversion of time and attention – it may take a long time and effort to negotiate the non-binding MOU / LOI. Time and attention might be better spent formalising the actual legally binding agreement itself.


Protracted negotiation – once the MOU / letter of intent has been agreed upon, the parties may shirk the negotiation of the binding agreement, leading to protracted negotiations on key terms of the transaction.


Missed opportunities – signing an MOU / letter of intent will result in certain moral commitments to the other parties, even if it may take a long time to execute. This may lead to missing other opportunities in the market.


Unworkable deal – the deal may be unworkable or the parties may not be able to agree on key issues in the first place. Yet the parties still enter into an MOU / letter of intent as an agreement to agree with the hope to progress them in the future, which may ultimately end up being a total waste of time.


Leakage of Information – signing an MOU / letter of intent may result in a leakage of information. In particular, publicly traded companies with price-sensitive information and public disclosure obligations may be triggered unintentionally.


D. What to include in the MOU / Letter of Intent


Typically, an MOU / letter of intent would include the following:

  1. purpose of the document and the intention of the parties.
  2. the ideal outcome and the benefits each party hopes to get.
  3. the scope of the agreement and the items they have agreed on.
  4. the contributions by, and the roles and responsibilities of each party.
  5. key issues to be negotiated and the expected timeline.
  6. if certain binding provisions are required – e.g. confidentiality, applicable law, exclusivity, non-solicitation, or good faith negotiations.
  7. whether to impose a deadline to formalise the legally binding agreement.


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