Dinn, Hochman & Potter, LLC

What's a memorandum of understanding, and do I need one?

Business contracts can be informal or formal, oral or written. And sometimes the process of reaching an agreement can involve extensive and detailed negotiations before the two sides can reach a point of "agreeing to agree." In this kind of situation, sometimes the parties to the upcoming agreement will enter into a document meant to memorialize the points they want to make sure are addressed in the final contract. This document is referred to as a "memorandum of understanding" or as a "letter of intent."

Memoranda of understanding are frequently used in contracting with government entities and in international business negotiations, but they are not confined to those two areas. They can be employed in any contract negotiation. These documents do not usually generate controversy, but depending on the way they are written they can become what the law refers to as a "quasi-contract," meaning that they contain enough detail about the parties intent to be bound to an agreement that they can effectively become contracts unto themselves. That is what happened, for example, in the case of Pennzoil v. Texaco in the 1980s, when an attempt by Texaco to interfere with a business acquisition by Pennzoil ran afoul of a memorandum of understanding between Pennzoil and the company it was negotiating to acquire that the court ended up treating as a contract.

Whether you should utilize a memorandum of understanding in your business contract negotiations is a matter that requires a degree of inquiry that this post cannot cover by itself. If you have would like to know more about whether to enter into such a negotiation strategy, an Ohio law firm that has experience with drafting and negotiating business contracts can help you to make the best decision for your company.

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