Boilerplate Blurb: Memorandum of Understanding

Hey everyone, this will be the last weekly Boilerplate Blurb for 2011. I will be cutting back the number of Boilerplate Blurbs to once a month and shifting gears to roll out new content. So look for it in 2012. So let’s get to it!

Letter of Intent or Memorandum of Understanding

As a small business and startup attorney, many of my clients are not laden with cash to spend a lot of time and money of negotiating a 100-page agreement. Time management for an owner-operator consists of being at the storefront (so to speak) while spending time with the banker, accountant, attorney, and doing their own books and marketing. Thus when they come upon deals that require time and thought they sometimes feel like they have to rush through it to secure it.

In cases like that, especially where the two parties met at an informal event or through networking, I sometimes advise that it might be best to set a date in the future to enter into a formal agreement, but during the negotiating and review process sign a letter of intent, memorandum of understanding, or term sheet.

Why?

It usually signifies that both of your will make a good-faith attempt to reduce your terms into a workable formal agreement. It basically says you are both interested, but you need time to evaluate and develop the agreement. In that way for the small business owner it gives them the kind of space and pacing at their own time without losing the deal immediately.

Lose? How could they Lose it?

Well, a memorandum of understanding is typically nonbinding, even though both parties sign it. What’s the point of that? Well, both parties generally use it as a guide, a starting point, for reaching the final agreement. However, during that process one party might in good-faith disagree with the final outcome. Recognize too that even if nonbinding, elements of the letter of intent, such as a confidentiality provision may become binding, which is important for startups floating future worker agreements, additional owners, or the like.

What is this Whole Deal with Good Faith?

Good faith is not a pie in the sky idea, it really does have a body of law lineage and is something courts do consider. Good faith requires you and the opposite party to deal with each other reasonably and fairly. So no sneaking around with prices and secret info to sabotage the deal and no blowing the guy off because you did not like way he looked one day. Therefore, if you enter a memorandum of understanding be honest and deal with the white hat on.

Example of the Nonbinding part of a Letter of Intent:

. . .

This document is only a Letter of Intent. It is not intended to be, and shall not constitute in any way, a binding legal agreement.

That’s it for this last Boilerplate Blurb of 2011, lookout for the next one sometime in January 2012.  Happy holidays!

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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One thought on “Boilerplate Blurb: Memorandum of Understanding

  1. Pingback: Boilerplate Blurb and Draw the Law: Tying it Together, Using a Memorandum of Understanding | The Blawg of Ryan K. Hew, Attorney At Law

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