What is a Letter of Understanding ?
Letter of Understanding (LoU) also called A Memorandum of Understanding (MoU) describes an agreement reached by two or more parties. It outlines everyone’s understanding of a specific situation. Consider it a formalised version of a gentleman’s agreement. An LoU specifies the roles, responsibilities, and compensation of all parties involved and must include:
All parties’ names and signatures are required.
What the project is and what its goals are.
A glossary of terms.
These are especially common in international treaties. An LoU can be considered confidential, whereas a treaty usually cannot.
Why use a Letter of Understanding ?
An Letter of Understanding can outline agreed-upon points during a transaction between a buyer and seller prior to the signing of a formal contract. This enables negotiations to continue after the main points have been identified and agreed upon, while the fine print is worked out.
When multiple parties plan to collaborate on a larger project, an LoU can outline the main points of the agreement before all parties sign the final legal contract, including the minor details that can take time to finalise.
In general, an LoU cannot be legally enforced due to its simplicity, making it difficult to resolve any misunderstandings that may arise. An LoU, on the other hand, can provide previously agreed-upon guidance while a more formal and legal contract is being created. This saves time and money when negotiating the final contract.
Format: Microsoft Word (.doc) (.docx) and Google Docs
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