What Is a Letter of Agreement?

Key Takeaways

• A letter of agreement is a legally binding contract outlining the terms between two parties.
• It is useful when no formal template exists or for unique, one-off agreements.
• Core components include the offer, acceptance, and consideration.
• It may also include boilerplate clauses such as dispute resolution and governing law.
• Letters of agreement are enforceable like formal contracts and can help avoid litigation.
• They are often used in personal arrangements, business partnerships, freelance work, and even debt settlements.
• Always include detailed, clear terms and get signatures from all involved parties.
• UpCounsel can help connect you with top attorneys to draft or review your letter of agreement.

What is a letter of agreement? This type of contract documents a legal agreement between two parties. It puts the terms of the agreement in writing as a means of resolving later disputes that may arise. Oral contracts are sometimes enforceable, but creating a letter of agreement strengthens the legality of the contract in question. A valid letter of agreement is the same as a valid contract.

When To Use a Letter of Agreement

When you need a legal agreement, it's usually easy to find sample templates online for common agreements such as customer contracts, leases, non-compete agreements, and employment agreements. In some cases, you need to document an agreement for which no existing templates apply. This is when a letter of agreement or memorandum of understanding (MOU) comes in handy.

Let's say you are interested in a friend's motorbike, and he tells you about plans to advertise it for sale for $2,000. You offer to buy it from him before he places the ad to the public. He is happy to do so if you commit to purchasing the bike, so you write him a check for $1,000 and promise to come up with the remainder within 30 days. In return, your friend promises to:

• Wait at least 30 days to post the motorbike for sale
• Return the check to you if you cannot pay the balance as promised
• Cash the check only when you deliver the rest of the money and receive the bike

This type of simple agreement can be documented with a letter of agreement. This is a basic type of contract that includes an offer, consideration, and acceptance of the offer. A contract that does not contain these elements, is overly broad, is illegal in the state in question, or a contract of adhesion is not valid.

Common Situations That Call for a Letter of Agreement

A letter of agreement is especially useful in situations where a more formal contract may not be necessary or available. These documents are common in various personal and professional contexts, such as:

• Freelance or contract work: To define scope of services, deliverables, timelines, and payment terms.
• Business partnerships: For joint ventures or collaborations that don't yet require incorporation.
• Intellectual property usage: When granting temporary permission to use copyrighted materials.
• Vendor or supplier relationships: Where mutual expectations and delivery terms are outlined.
• Real estate agreements: In preliminary arrangements before formal lease or sale contracts are finalized.
• Event planning: Where service providers (e.g., photographers, caterers) and clients need clarity on responsibilities.

These flexible agreements provide clarity and legal grounding without the need for overly complex documentation.

Common Uses and Benefits of a Letter of Agreement

A letter of agreement is often used in scenarios where the relationship or arrangement is informal or emerging but still requires legal documentation. These include freelance work, short-term projects, consultancy engagements, or collaborations where parties want to avoid the complexity of lengthy contracts.

Common use cases:

• Hiring independent contractors or consultants
• Partnership terms between small businesses
• Licensing or usage of intellectual property
• Artist or creative service agreements
• Event planning services
• One-time purchase or sale agreements

Benefits include:

• Clear documentation of expectations and deliverables
• Protection for both parties in case of disagreement
• Simplified negotiation and review process
• Cost-effective alternative to traditional legal contracts

Even when a formal contract is not required, a letter of agreement offers peace of mind and can prevent misunderstandings later.

Creating a Letter of Agreement

The letter of agreement can be a basic agreement on standard letterhead written by either party. Most commonly, the party who is making the offer writes the letter. Doing so also allows you to control the terms of the agreement provided the general understanding is reflected.

You can also use an MOU format, which is structured like a regular contract. You'll state the names of the parties, the date, and contact information. At the end of the document, each party will sign and date the document.

In the body of the letter or MOU, list the main points of the agreement and provide specific, thorough information wherever possible. This should include specific items for sale, space for rent, or services for hire. You can use bullets, numbered paragraphs, or any other preferred format.

Your MOU should be as concise as possible but may include provisions for jurisdiction, attorney fees and costs, amendments, choice of law, waiver of jury trial, assignments, notices, and/or counterparts. You should be able to use boilerplate clauses for most of these items.

When the letter is complete, send it to the other party with instructions to either sign the agreement or return it with requested revisions. You can sign the letter yourself before passing it along. This provides a simple process that also allows for negotiation.

Once all parties sign a letter of agreement, it becomes a binding legal document. You should include a signature block at the end with room for both signatures and dates with the heading "Acknowledged and Agreed." Both parties should keep a final, signed copy for their records. Parties can either sign one at a time or sign together and exchange copies. The latter method allows both parties to have original signed contracts instead of photocopied signatures.

Key Clauses to Include in a Letter of Agreement

While a letter of agreement can be simple, it should still include essential terms to ensure mutual understanding and legal enforceability. Consider including the following clauses:

1. Parties Involved – Full legal names and roles of each party (e.g., Client and Contractor).
2. Purpose of Agreement – A clear statement of what the agreement intends to cover.
3. Obligations and Responsibilities – Specific duties or services expected from each party.
4. Payment Terms – Compensation details, including amounts, deadlines, and payment methods.
5. Duration and Termination – Start and end dates, with conditions for early termination.
6. Confidentiality – If applicable, to protect sensitive business or personal information.
7. Dispute Resolution – Mediation or arbitration methods, including jurisdiction and governing law.
8. Amendment Process – Conditions under which the agreement can be altered.
9. Signatures and Dates – Spaces for both parties to sign and date the document.

Including these standard elements helps prevent miscommunication and strengthens legal protections.

Tips for Writing a Clear and Professional Letter of Agreement

When drafting a letter of agreement, keep these best practices in mind:

• Use plain language: Avoid legalese. Write in clear, understandable terms.
• Be specific: Detail every obligation or expectation. Vague terms can lead to disputes.
• Stay organized: Use bullet points or numbered lists for easy reference.
• Keep it concise: Avoid unnecessary detail but ensure all important terms are included.
• Review carefully: Always proofread for errors, inconsistencies, or omissions.
• Include contact information: Make it easy for the other party to reach out with questions or clarifications.

If you're unsure about any part of your draft, you can consult an attorney through UpCounsel to ensure your letter of agreement is comprehensive and enforceable.

Letter of Agreement and Bankruptcy

Letters of agreement are often used when an unsecured creditor agrees to settle the debt for less than the amount owed. This is a voluntary agreement governed by contract law and is sometimes called a scheme of arrangement. When the debtor is insolvent, a deed of arrangement is used. The purpose of these letters is to prevent bankruptcy.

Differences Between a Letter of Agreement and Other Contract Types

Although a letter of agreement functions similarly to formal contracts, it's distinct from other legal documents in tone, formality, and usage. Here's how it compares:

• Versus Formal Contracts: Letters of agreement are often shorter and written in letter form, whereas contracts are structured with numbered clauses and legal formatting.
• Versus Memorandums of Understanding (MOUs): MOUs express intent and may not be legally binding. Letters of agreement, once signed, typically are.
• Versus Letters of Intent (LOIs): LOIs outline preliminary terms for future negotiations, while letters of agreement confirm an active deal.
• Versus Employment Agreements: Employment contracts are highly detailed and governed by labor laws, while letters of agreement may be used for freelance or short-term hires.

Understanding these differences ensures you're using the right type of agreement for your situation.

Legal Validity and Enforceability of a Letter of Agreement

A signed letter of agreement has the same enforceability as a traditional contract, provided it includes the essential elements of a valid contract:

• Mutual Consent: Both parties agree to the terms.
• Offer and Acceptance: One party makes an offer, and the other accepts.
• Consideration: Something of value is exchanged (money, goods, services).
• Legal Capacity: Both parties are of sound mind and legally able to contract.
• Legal Purpose: The content of the agreement must not be for an illegal activity.

Courts can and do uphold letters of agreement in disputes, particularly if the document shows a clear intent to form a binding arrangement.

Frequently Asked Questions

Is a letter of agreement legally binding?Yes, if it includes the essential elements of a contract—offer, acceptance, consideration, legal purpose, and mutual consent—it is legally enforceable.

Can I write a letter of agreement without a lawyer?Yes, especially for simple transactions. However, legal review is recommended for more complex or high-value arrangements.

What is the difference between a letter of agreement and a contract?A letter of agreement is typically shorter and more informal in structure but can be just as binding as a standard contract.

Can a letter of agreement be used in court?Yes. Courts can enforce a letter of agreement if it's signed and includes the basic legal components of a contract.

What happens if one party breaks a letter of agreement?The other party may pursue legal action for breach of contract, which could result in compensation or enforcement of terms.

If you need help with a letter of agreement, 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, Menlo Ventures, and Airbnb.