Recently, media outlets released video of President Donald Trump and his own U.S. Trade representative verbally sparring over whether a document labeled a memorandum of understanding could possibly be binding. However, the idea of a businessperson believing a memorandum of understanding (or MOU) to mean one thing and an experienced trade attorney knowing it to mean something else within the context of international trade law is not surprising. Contract labels such as term sheet, letter of intent and MOU are often used casually and interchangeably in the business world with the presumption that such documents represent the mere nonbinding precursor to a more elaborate and detailed written agreement often referred to as the “definitive agreement.” Such a presumption, however, can be dangerous.
A term sheet is generally used to highlight the key business terms of the deal before the preparation of the more comprehensive agreement begins. I like to think of it as a “key points” document. Of course what those key points might be depend on the type of deal it is. For example, in relation to a venture capital investment it ordinarily covers the type of investment being made, the valuation that investment is based upon, the type of securities being acquired and the rights the investor will have with respect to those securities. A term sheet can, and often should, be used as the starting point in any type of business transaction. It can help prevent a situation where the attorneys begin preparing and discussing documentation only to realize that their clients are not in agreement on various fundamental aspects of the deal, such as key business terms. This situation will often lead to higher legal fees for clients as it forces both the drafting and negotiating phases of the transaction to drag on unnecessarily and can lead to further miscommunication and misunderstanding between the parties, which can set the entire relationship off on the wrong foot. The term sheet tends to be prepared in bullet point form and is generally not signed by the parties. In my view, depending on the client’s objectives, it should contain language conspicuously stating that the document is nonbinding under any and all circumstances and that neither party will have any obligations or liabilities to the other should a party elect not to proceed for any reason or no reason.
A letter of intent, consistent with its name, is often written using a letter format and generally will include more qualitative information relating to the parties’ intentions. This is not to say that it cannot or should not include language comparable to that found in a term sheet, but it often includes some additional aspects of the deal better served by a more narrative and less abbreviated style. It might, for example in relation to a business acquisition, address issues such as confidentiality, noncompete obligations of principals, tax treatment, reorganization issues and so forth. Where the term sheet provides the parties with a meaningful starting point, the letter of intent or LOI provides the parties with both a meaningful starting point and a means to begin managing each other’s more detailed expectations sooner rather than later. The document may specify that only certain provisions are to be deemed binding such as that the buyer may commence due diligence on the seller immediately but must keep the seller’s information confidential from third parties. The same document might include a price for purchase, which the document makes clear is not intended to be binding. After all, who knows what the buyer might find while conducting initial due diligence? As with the term sheet, the LOI should clearly state what the objectives of the parties are with respect to the document and whether the parties intend the document to be binding in part or in whole. The document might even state that the parties are not obligated to negotiate in good faith and can terminate the discussions at any time for any reason or no reason in such party’s sole and absolute discretion. Often, a letter of intent is meant to capture what the parties’ understanding of the relationship is early on so as to mitigate the possibility of a misunderstanding later on in the process, such as when the formal and definitive agreement is prepared and negotiated.
A memorandum of understanding tends to be more comprehensive and may contain greater details than that which is contained in a letter of intent. In fact, depending on the context and customary practice, in some cases it could represent the final understanding and agreement of the parties. This was exactly the point expressed by the U.S. Trade representative in his aforementioned disagreement with Trump. In fact, to address the Commander-in-Chief’s disbelief that an MOU could be anything but a mere suggestion, he went on to stipulate that henceforth the very same document would only be referred to as a trade agreement and not an MOU.
Ultimately, however, what needs to be recognized is that whether the document is titled term sheet, letter of intent or memorandum of understanding the basic elements of contract law (offer, acceptance, consideration and a meeting of the minds) are not suspended. The extent to which the parties intend that the document be binding, or not, should be made crystal clear so as to diminish the possibility of a future dispute. The title of the document might help inform the court as to the parties’ general intentions, but it is hardly dispositive. The language of the agreement, the context in which it has been prepared, specific disclaimers included (or not included) and other factors all matter. What’s in a name? When it comes to these documents, not much. Whether it is titled a term sheet, a letter of intent, a memorandum of understanding or, yes, even “peaches,” as the president once jokingly referred to his proposed border wall, one should be careful to understand the objectives for preparing such a document and its potential consequences.
Perry F. Sofferman is a shareholder in the general practice group of Fowler White Burnett. His areas of practice include corporate, intellectual property and international law. He was recently named the new author of the Florida Limited Liability Company Forms and Practice Manual. Perry may be reached at firstname.lastname@example.org.