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The concept is similar to the so-called heads of agreement. LOIs resemble written contracts, but are usually not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as non-disclosure agreements, a covenant to negotiate in good faith, or a "stand-still" or "no-shop" provision promising exclusive rights to negotiate. A LOI may also be interpreted as binding the parties if it too closely resembles a formal contract.
The purposes of an LOI may be:
- to clarify the key points of a complex transaction for the convenience of the parties
- to declare officially that the parties are currently negotiating, as in a merger or joint venture proposal, or
- to provide safeguards in case a deal collapses during negotiations.
A LOI may also be referred to as a memorandum of understanding (MOU), term sheet or discussion sheet. The different terms reflect different styles, but do not indicate any difference under law. A contract, in contrast, is a legal document governed by contract law.
There is however a specific difference between an LOI and MOU, whereby an LOI is the intent from one party to another and does not in this case have to be signed by both parties, whereas an MOU is an agreement between two or more parties, which should be signed by all parties to be valid.
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