A Memorandum of Understanding (MoU), or a Letter of Understanding (LoU) contract, explains an agreement made between two or more parties. It outlines the understanding all sides have regarding a specific situation. Think of it as a formal version of a gentlemen's agreement. An MoU states specific roles, responsibilities, and compensation of all involved parties and must include:

  • The names and signatures of all parties involved.
  • What the project is and its objectives.
  • A summary of terms.

These are especially common in transnational agreements. An MoU can be considered confidential, while a treaty is typically not able to be.

Memorandum of Understanding vs. an Agreement

An MoU does not have the same legal weight of a contract, so creating a comprehensive agreement with clear wording and terms spelled out is important in ensuring an MoU will be enforceable. "MoU" is also occasionally used to refer to a Letter of Intent (LoI). An LoI can let the other party know you are interested in being part of an agreement or activity, but does not legally require you to participate.

Implementing an MoU in Transnational Situations

Unlike more formal contracts or treaties, an MoU can usually be established internationally without approval from lawmaking branches of government. Many internal agreements are MoUs, as they take less time to implement and are easier to modify if necessary. Some examples of MoUs are:

Writing an MoU

An MoU can be as simple or detailed as both parties want in order to feel comfortable with the deal. This can consist of an email from one party explaining the deal, then the other party replying to the email in agreement.

Contracts can sometimes be viewed as intimidating. In this case, individuals or organizations may be more inclined to enter into an MoU as opposed to a legal document when talking about using space or sharing information.

The Legality of an MoU

Generally, an MoU cannot be legally enforced due to its simplicity, which makes it hard for any misunderstandings to be resolved if they occur. However, an MoU can provide guidance already agreed upon while a more formal and legal contract is being created. This saves time and money during final contract negotiations.

Business Negotiations and MoUs

During negotiations for a business transaction, MoUs (or LoUs) are shared in press releases as a sign that the parties have officially entered into negotiations.

MoUs and LoIs are similar in that they both outline specific agreements all parties have agreed upon, including confidentiality and agreeing to arbitration in case of disagreements. These can be modified as needed during the negotiation process.

While similar in some ways, MoUs and LoIs do have some important differences. An MoU can be used to outline agreements between multiple parties while an LoI is only applicable for two. The other difference is that an MoU is signed by all parties mentioned and involved in the agreement while the LoI is only signed by the side that originally created the form and forwarded it to the other side.

When to Use LoIs and MoUs

During a transaction between a buyer and seller, an LoI can outline agreed-upon points prior to a formal contract being signed. This allows negotiations to continue once the main points have been identified and agreed upon while the fine print is being worked out.

When multiple parties are planning to work together on a larger venture, an MoU can outline the main points of the agreement before all parties sign the final legal contract, including the smaller details that can take time to finalize.

Sample Letters of Understanding

While MoUs and LoIs do not have the same legal consequence as formal contracts, using a template can make your document look more professional. MoU and LoI templates can be found on several internet sites, including UpCounsel.

If you need help with a Letter of Understanding Contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.