What is the Difference Between a Memorandum of Understanding and a Letter of Intent?
Memorandums of understanding and letters of intent differ largely in regards to their legality. Read our article to find out which one you need.
The Australian legal system provides many different documents that companies can use to protect agreements, record information and enforce their rights. A memorandum of understanding and a letter of intent are such documents. It is ideal to have a good grasp of them for this reason. Depending on what stage you are at for your business, you may need one of these documents or perhaps both at different times. Below we will explain what they are and when you should ideally use them.
Memorandums of Understanding
A memorandum of understanding is simply a non-binding document that records proposed terms in the negotiation stage. It is a handy document to have to just note down any agreements or vital details before entering into any legally binding contracts. Therefore, there are no cons to having one there. They are also useful in the event any party breaches the contract. You can use the memorandum as evidence to support your side.
If there is sensitive and private information this can also be protected with a memorandum of understanding. If the parties are still unsure about each other and need to discuss further before entering into contracts, this document is also ideal. The memorandum will effectively end when the parties agree to stop negotiations. Therefore, there is no need for a formal document to state the memorandum has expired.
What is included?
- It should state the purpose of the memorandum.
- The intentions of the parties and their roles in the agreement.
- A time frame of when the partnership will start and end.
- Any disclaimers you may wish to make known.
- What the financial obligations are for each party.
As this is not a legally binding document, usually a lawyer is not required to draft anything up for you. However, it’s important to ensure that the document doesn’t accidentally become legally binding. Therefore, having a lawyer analyse it and fix anything major is always recommended. Otherwise, downloading a copy and customising it to suit your specific conditions is an easy way to ensure it’s an effective memorandum.
A real life example is the memorandum of understanding signed between ASIC and the Monetary Authority of Singapore (MAS). The purpose of the memorandum was to express the intent to cooperate and fulfil their respective roles, while maintaining confidentiality. This came about after ASIC licensed a Singapore based trade repository.
Letters of Intent
After the first negotiations, you may be ready to enter formal negotiations. This is where the letter of intent comes in. It is a legally binding document with the purpose of getting things rolling. The most common times where this is used is when there is a clear time pressure. If there is no time to wait for a formal contract to be drafted then a letter of intent is quick and simple to create. For example, construction projects where there is a very strict time frame would most commonly use this type document.
A customisable document can easily cover everything you need until that official contract is available.
- Termination circumstances.
- Confidentiality terms.
- Obligations of parties.
- Costs and financial responsibilities of the parties.
- Rights and remedies.
- The relevant law.
As this is a legally binding document, it is ideal to have legal counsel either draft it up entirely or to review an existing one.
Essentially the main difference between a memorandum of understanding and letter of intent is that the former is not legally binding while the latter is. Depending on what stage your company is on, you may need both types of documents. Or you might not even need either of them.
If you require further assistance, a lawyer could help clear this up for you after a confidential discussion.
Taeisha is a Legal intern at Lawpath. She is a Law student at Macquarie University, previously completing her Commerce degree. She has an interest in Commercial Law.