The Financial Times recently reported that Royal Dutch Shell, one of Europe’s largest energy groups, signed a memorandum of understanding to form a $12 Billion joint venture with Cosan, a large Brazilian sugar cane processor.
What if the parties had signed a letter of intent? Does it make a difference?
Probably not. It would generally mean that only one of the parties signed what is fundamentally an “agreement to agree.” The main difference between a Memorandum of Understanding and Letter of Intent is the nature of the signatories. Otherwise they are largely the same.
- Number of Signatories Differ
In a Memorandum of Understanding, more than two parties may be involved but for a letter of intent only two parties are involved. Memorandums of understanding imply that all the parties involved have to be signatories, while a letter of intent needs only the party which proposes the agreement to be a signatory.
- Both Define Intent of the Parties
Like a Memorandum of Understanding, a Letter of intent is a document which describes an intention to take some action. From the business point of view, it is defined as an agreement between two parties before the agreement is finalized. It is basically a compilation of key points of an agreement between the two parties who intend to conduct a business transaction.
When announcing a joint venture like the recent Royal Dutch Shell-Cosan deal, memorandum of understanding and letters of intent are signed for the purpose of declaring that the various parties involved are negotiating a contract. They are something that parties fall back on if the negotiation between the parties is sabotaged. Simply put, it is the agreement signed prior to the final agreement.
- Both Can Be Binding
Both Memorandums of understanding and letters of intent can resemble a written contract but usually not binding on the parties in their entirety. Many of these agreements, however, contain provisions that are binding, such as non-disclosure and non-compete agreements. Be careful, as these agreements may also be interpreted as binding in their entirety to the parties if they too closely resemble a contract.
To give you some guidance on how they can be used, I have embedded some sample agreements below (solely for illustrative purposes):
While both agreements are nonbinding, note that a section of the letter of intent is binding but only as to confidentiality. This is just one of many ways that you can draft either of the agreements to suit your needs.
If you have any specific questions, I’ll be delighted to answer them.