Although oral contracts are enforceable in certain circumstances, it’s always better to have an agreement committed to writing. Usually, choosing a format for an agreement is a fairly straightforward process because you can always locate or purchase sample forms for standard situations, such as property leases, non-competes, customer contracts, employment agreements, and so forth. (For examples of these and other form documents, see Legal Forms for Starting & Running a Small Business). If you have any corporate attorneys at your disposal, then they will likely have their own forms for these matters. However, occasionally there are instances where you’ve conceptually come to a fairly simple understanding with another party, but there are no applicable forms out there for you to use. These are situations where either a letter agreement or a memorandum of understanding (MOU) could be a preferred option.
Imagine that you have a friend with a motorcycle that you’ve always fancied. He casually mentions that he is about to publish an advertisement to sell the bike for $1,000 (the purchase price). You tell him that you would like to buy it from him before he offers the opportunity to the general public. He says that he’s fine with holding off on the ad, so long as he knows that you’re serious. So, you agree to compromise by immediately writing him a check for half of the purchase price, and promising to pay him the rest in one month. In the meantime, he commits to:
What would you call this type of agreement? Technically, it’s an option to purchase. One could also call it a deposit agreement. But, this is a perfect example of a unique situation that does not have a readily-available precedent contractually. It is also a fairly simple arrangement in which, although you are friends who completely trust each other, the fact remains that there is money involved, and you both would feel more comfortable memorializing the agreement in writing. As such, this would be an appropriate situation to enter into a short and simple letter agreement or MOU.
The primary difference between a letter agreement and an MOU is the structure. A letter agreement is, literally, a letter written from one party to the other that details your understanding. As such, the sender would write the letter in normal fashion, on standard letterhead. While either party can be the author of the letter, it usually depends on who is asking to have the agreement in writing, who most wants to dictate the terms of the agreement, or who is making an offer. In the example above, it would intuitively make the most sense for you to write the letter, since you are the one offering to buy the motorcycle and putting up a deposit. This also gives you more control over the specific terms you want reflected in the letter, since recipients of letter agreements often pay little attention to the contents of the document (so long as it accurately reflects the general understanding of the parties), or might only have a small number of revisions. In any case, it gives you the first crack at putting your agreement in the terms there are most comprehensive and beneficial to you.
Using the example above, a letter agreement would also give you the opportunity to close the letter with a simple instruction that if your friend is in agreement with its terms, all he has to do is to sign it and return it to you. This not only simplifies the process for the counterparty, but it also gives you an advantage from a negotiation standpoint.
Like a letter agreement, an MOU is a simple document signed by both parties, but it is structured more like a standard agreement. It will begin by stating the date, the names of the parties involved, and other identifying information, such as their addresses (or states of incorporation, if the parties are entities). At the end of the document, the parties either sign individually or on behalf of their respective entities. Structurally, however, the body of a letter agreement and an MOU can theoretically be the same.
Immediately following the introduction to the document (which would be the greeting, in the case of a letter agreement, or the recitals, in the case of an MOU), the body of the document should begin with the main deal points agreed to by the parties. They should be as thorough and as specific as necessary to properly reflect your understandings. This can be done in the form of numbered paragraphs, bullets, or whatever format you like. Also, do not worry that the agreement might be too short. Sometimes, you only need a few sentences to convey the full purpose of the document. Remember that the intent in using a letter agreement or an MOU is to be as concise and efficient as possible for the simple purpose of getting your contract on paper. For further suggestions on what content you might want to include in your letter agreement or MOU, see Ten Tips for Making Solid Business Agreements and Contracts.
Once you’ve included all the deal points in the body of the contract, all you need to do is add standard boilerplate clauses that most agreements have (called miscellaneous provisions). The miscellaneous provisions include choice of law, jurisdiction, waiver of jury trial, costs and attorney’s fees, notices, assignment, amendments, and counterparts. Some alternative or additional miscellaneous provisions might be applicable, depending on your particular situation. For further discussion regarding these miscellaneous provisions, see Common Boilerplate Provisions in Contracts.
All that remains is to sign the agreement. One advantage to a letter agreement is that you can sign it before delivering it to the other party, so long as you anticipate that the other party will be fine executing the document as-is. Your letter agreement must include an “Acknowledged and Agreed” signature block at the end of the document for the counterparty to fill in and sign. The document becomes legally binding once it has all required signatures.
In the case of an MOU, you both can either sign the document simultaneously or have it executed in counterparts, with the signatures to be exchanged thereafter. In any case, it is optimal for both parties to have a copy of the fully-signed, final document for their records. Alternatively, the parties can each sign two identical copies of the agreement so that they can both walk away with original signatures.