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Difference between MoU and Letter of Intent

Created on 29 Aug 2018

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Updated on 13 Sep 2023

Difference between MoU and Letter of Intent

Memorandum of understanding abbreviated as MOU and letter of intent as LOI, are two different terms but they somehow seem similar and people often get confused over it. This article tries to explain the difference between the two.

Letter of Intent (LOI)

In many business transactions the parties negotiate and sign Letter of Intent (LOI), to ensure that they get preliminary terms of an agreement before spending time and money on any kind of agreement. It may be formal or informal. The idea of LOI begins as a proposal from one party to another which is then negotiated and modified so that the final LOI reflects both parties’ expectations on the deal. 

If the party cannot agree on LOI it quickly shows that they will not be successful in completing business transactions.LOI can be used in any type of deal, some of them are:

  • A lease arrangement
  • The purchase and sale of property
  • The purchase and sale of the stock and assets of business

LOI contain specific information:

  • Identification of parties
  • Identification of property or business that is the subject to the transaction
  • Financial terms
  • The parameters for a study period or required due diligence information
  • A closing date
  • Financing specifics

The LOI could be binding or non-binding upon the parties in a court of law, subject to their mutual agreements.

Memorandum of Understanding (MOU)

MOU outlines the details of an agreement between two or more parties who intend to work together toward common goals and objectives. Also MOU is complex process and detailed than a contract, while providing a framework.MOU may state that the parties “agree to promote and support the joint use of facilities”.

Many companies and government agencies use MOU to define a relationship between departments, agencies and closely held companies.

Contents of MOU:

  • Name of the Parties involved
  • Purpose of entering
  • Roles and responsibilities
  • Terms and conditions
  • Project goals and key services to be provided
  • Resources contributed by each party
  • Signature of all the parties involved

 

MOU is a kind of formal agreement which carry a degree of seriousness and mutual respect towards party to the MOU. It is first step towards the legal contract. Hence what we conclude about MOU is that it holds a lot of power because of the time, energy and resources needed to draft an effective and fair document.

Difference:

 

Basis

Letter of Intent

 

Memorandum of Understanding

 

Nature of parties

In LOI two parties are involved.

 

In MOU more than two parties may get involved.

Legal

Enforceability

It may or may not be enforceable in a court of law.

It is enforceable in a court of law.

Signatories

LOI, 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.

The terms, actions, and conditions listed in an MOU are signed by all parties that are in agreement.

Uses

LOI is 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.

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.

Continuance

LOI is often converted into a contract later, thus have limited use.

MOU often continue to stay at its form until the completion of the task or project.

Conclusion:

The LOI and MoU do not have very contrasting difference as both of them outlines the intention of taking specific actions and are not legally binding unless and until it is mention under special clause for enforceability. The main difference that we conclude is the nature of parties involved under MOU and LOI and it should be noted that LOI is suitable for doing negotiations on preliminary basis but MOU may be more suitable as alternative for contract.

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