Remember that old adage, "Get it in writing"? Oral agreements or contracts are enforceable in some circumstances. But when it comes to some business arrangements—like partnering with your brother-in-law to buy a boat or buying a big-ticket item you can't immediately take home—a letter agreement or memorandum of understanding (MOU) will do a better job of protecting your interests.
Both documents can be legally binding if they include the essential terms of the agreement, including the parties' intention that they be bound by these terms, and everyone involved signs the document. The biggest difference between a letter agreement and a memorandum is the way each is structured.
A letter agreement—also called a "letter of agreement" or an "agreement letter"—documents an agreement between two or more parties. The agreement is structured as if it were a letter, with separate paragraphs, a date line, and places at the bottom for signatures.
The contract will be as legally sound and enforceable as a document produced by a lawyer's office as long as the letter includes:
The lawyer's version is likely to have a bunch of legalese ("Whereas so-and-so wishes to…"), use paragraphs identified by Roman numerals, include a bunch of clauses (paragraphs) that are mostly inessential, and be 17 pages long. But the essential question for each format—will it be upheld as binding if challenged and examined by a judge—is the same. Parties typically use letter agreements when they want to memorialize their agreement and don't want to spend the time and expense consulting with an attorney; or when they just feel better using a presentation that's less imposing than a memorandum.
The terms you should include in either document are similar. So, if you and your brother-in-law decide to buy a boat together, you might verbally discuss how you'll split the cost, the days you'll each use it, how you'll handle repairs and pay for maintaining it, how to handle matters if one of you wants to sell, and other terms and situations that might arise. Putting those verbal agreements in writing with a letter agreement can help you avoid misunderstandings and protect your interests if a time comes when one (or both of you) feels the other is treating the arrangement improperly.
A letter agreement can be as long or as short as necessary to cover the points you wish to include, but you should describe the terms as completely and clearly as possible. Using the example above, a letter agreement might include:
You can also find templates for letter agreements and MOUs online.
An MOU also spells out an agreement much the same as a letter, and it can be used in the same types of situations. Whether a court would enforce it depends on whether the memorandum includes the deal's key terms, a statement of binding intent, and signatures (just like the test for a letter agreement).
But an MOU is structured like a contract—it's a bit more formal than a letter, but not a full-blown lawyerly document (no Gothic lettering, please).
People usually structure an MOU with numbered paragraphs, but you can also use bullet points or any other type of formatting. (We offer suggestions for the content you should include in our article on 10 tips for making a solid business agreement.)
In general, your MOU would start out with a title, such as: "Memorandum of Understanding Between Jane Smith and John Doe," with each party's address and the date of the agreement, followed by numbered sections that include:
Not all pricey transactions require an agreement or MOU. For example, if you purchase an expensive piece of original artwork at an art fair, you'll pay the agreed-upon price, walk out with the painting and a receipt for your purchase, and you won't need further documentation.
But let's say the artwork you'd like to buy has a sold sticker on it, and the dealer tells you that a similar piece by the artist is available at the gallery. The dealer tells you the gallery plans to auction the painting but will hold it and allow you time to visit the gallery and decide whether you want to buy it. But you must be willing to place a sizable deposit on the piece.
In this situation, you'll probably want to draw up a letter agreement or an MOU that includes:
Whether you're using a letter agreement or an MOU, you would end the documents with a statement that your signatures indicate your intention to be bound by the terms outlined above, and each party would sign and date the agreement or MOU.
Either party can draft a letter agreement or MOU. The job usually goes to the side that:
In the artwork example above, it would make sense for you to write the letter, because you're the one offering to buy the painting and putting up a deposit. As the drafter, you'll also have more control over the specific terms you want reflected in the letter or MOU. (But by the same token, a savvy gallery owner will want to draft the agreement to make sure that clauses that are in its favor are included.)
You can each sign the agreement or MOU simultaneously, or you can sign separately, but it's a good idea for each party to have a fully signed copy for their records.
This article has explained how to write either document in a way that's legally binding. But if you're using an agreement letter or MOU as a place to record ongoing discussions, with the intent of finalizing the details later; or if you plan to execute a formal contract later with a lawyer and you're still exploring options, you can instead write a nonbinding letter or MOU. You'll want to be sure to include very clear language that states that the agreement or MOU isn't binding.
That language might look something like this: "My signature indicates that the above are preliminary considerations; my signature does not reflect my intention to be bound by the above terms."
On the other hand, you might be presented with a letter or MOU that doesn't specify whether it is legally binding. Don't let this sloppiness get you into trouble. If you don't want to be bound by the agreement, be certain that you add a statement to that effect before you sign the document. And if you do want the document to be binding, be sure to add language like that mentioned above, which makes the parties' intentions clear.