Letters of Intent (LOI), Memorandum of Understanding (MOU) - when do these documents make sense?

Pre-contractual agreements help outline the intentions and key points of a potential collaboration before a binding contract is finalized. They can be useful for establishing clarity but should be carefully drafted to avoid unintended legal obligations.

Key Message: Letters of Intent (LOI), Memorandum of Understanding (MOU) are synonyms for pre-contractual documents of parties seeking to conclude a contract. Such documents can make sense for symbolic or tactical reasons. If the aim is to simplify negotiations, a term sheet is recommended. Attention is necessary if the documents unintentionally (!) contain legally binding obligations.

In detail:

1. Areas of application

LOIs or MOUs are often used to set out the intentions of the parties in mergers, acquisitions, joint ventures, major development collaborations ("R&D") or similar extensive projects. They document the key points of an intended collaboration or transaction and serve as a guideline for the drafting of final contracts.

LOIs and MOUs often contain a provision that public communication (e.g. media release, post on social media) will take place once the document has been signed. LOIs and MOUs therefore often have an important influence in the area of communication/marketing.

2. Label / Title

The terms Letter of Intent (LOI) and Memorandum of Understanding (MOU) are basically synonyms for pre-contractual documentation. LOI is often used when the contractual intention is already relatively clear or when only one party expresses an intention. MOU is used more frequently in a political context and tends to be regarded as a somewhat weaker declaration of intent. An MOU is always signed by at least two parties. As with all legal documents, it is not the title but the content of the document that is decisive.

3. Binding or not?

LOIs and MOUs are not legally binding in the "classic" version. This means that they only contain the intention of he parties to negotiate a contract, but not a binding obligation to do so.

However, certain binding rules are sometimes (consciously or unconsciously) incorporated into LOIs or MOUs. Binding rules can be found in particular for the following aspects:

• (Joint) communication about the content (e.g. media release, post on social media)
• Exclusivity of the parties to negotiate only with each other (and not with third parties) for a certain period of time for the intended purpose

It is important that the parties are aware of whether and which provisions are binding.

4. Advantages

A major advantage of LOIs and MOUs is the ability to reach agreement on key aspects of a cooperation or transaction at an early stage. They enable a rapid response to market opportunities.

Another major advantage is the comparatively quick and uncomplicated basis for communication to the public. LOIs and, in particular, MOUs often stipulate (bindingly) who may communicate what and how about the content.

5. Disadvantages

A major disadvantage is the potential legal uncertainty between the parties if no contract is subsequently concluded.

LOIs and MOUs can be interpreted differently, especially if they are not formulated precisely, and thus lead to delays in contract negotiations.

Resources must be invested in the preparation of LOIs and MOUs, which are only worthwhile if they effectively shorten the contract negotiations.

Another disadvantage is that in practice, legally binding obligations are often "hidden" under the title LOI or MOU and inexperienced parties are not aware of the corresponding consequences.

6. Difference to the term sheet

A term sheet is also a pre-contractual document that aims to conclude a contract. In contrast to the LOI and MOU, however, a term sheet already contains the intended contractual structure in relative detail. You can find out more about the term sheet in this blog post: Term sheet - useful yes or no?

A term sheet is preferable to an LOI or MOU if no public communication is desired and the main objective is the efficient preparation of the negotiation and identification of any "deal breakers".

7. Checklist

The following checklist can serve as an aid for the formulation and review of MOUs or LOIs:

• Delimitation of legal binding force: Explicit clarification of which parts of the document are legally binding.
• Time frame: Determination of a timetable for the subsequent negotiations and of expiry conditions.
• Exit clauses: Provisions for breaking off negotiations or cooperation.
• Confidentiality clauses: Ensuring that sensitive information is protected.

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