A letter of understanding is a short written summary of what two sides have discussed and tentatively agreed to before they sign a formal contract. Below is a sample letter of understanding you can adapt, along with the information to collect before drafting, the word choices that keep it non-binding, and the clauses most people carve out as enforceable.
What This Document Is For
A letter of understanding puts preliminary terms on paper so both sides can confirm they agree before investing in lawyers, accountants, or detailed contract drafting. It typically covers the broad strokes: who is involved, what each side will contribute, a rough timeline, and a financial framework. It then serves as a reference when the parties move into the formal contract.
You will see the same document called a memorandum of understanding or a letter of intent. The labels are largely interchangeable. What matters legally is the language inside, not the title on top.
Information to Gather Before You Draft
Collecting these details first saves revision cycles later:
- Full legal names and addresses for every individual or entity involved. For a business, use the registered entity name, not a trade name or abbreviation.
- Scope of the arrangement. Pin down the specific tasks, services, or goals. Vague descriptions like “consulting services” invite later disagreements about what was actually promised.
- Financial terms: payment amounts, budget ceilings, who covers which expenses, and when payments are due. Even preliminary numbers force both sides to confirm they are in the same range.
- Timeline: effective date, key milestones, and any deadlines. If the arrangement depends on an outside trigger such as funding or regulatory approval, note it.
- Termination terms: how either side can walk away, how much notice is required, and whether anything survives expiration.
One technical point if the eventual deal is for the sale of goods. Under the Uniform Commercial Code, a written agreement covering goods worth $500 or more generally needs to show the quantity to be enforceable. Price can be omitted or stated incorrectly without killing the writing, but the agreement will not be enforced beyond the quantity actually stated.1Legal Information Institute. Uniform Commercial Code 2-201 – Formal Requirements; Statute of Frauds That matters when your letter is the only writing in existence before a formal contract is drafted.
Sample Letter of Understanding
Replace every bracketed placeholder with the specific details you gathered above.
[Company or Individual Name]
[Street Address, City, State, ZIP]
[Date]
[Recipient Name]
[Street Address, City, State, ZIP]
Subject: Letter of Understanding Regarding [Project Name]
This Letter of Understanding summarizes the discussions between [Party A Name] and [Party B Name] as of [Discussion Date]. The participants intend to collaborate on [Brief Project Description] starting on [Effective Date].
[Party A Name] intends to provide [Service/Resource], while [Party B Name] intends to contribute [Service/Resource].
Financial compensation for this arrangement is expected to be [Dollar Amount], payable according to the following schedule: [Payment Dates and Amounts]. Both participants expect work to reach [Milestone 1] by [Date] and [Milestone 2] by [Date].
This document is not legally binding and does not constitute a contract. It reflects a mutual understanding of the terms the participants expect to include in a future definitive agreement. Neither participant is obligated to enter into a binding contract based on this letter, and either participant may end discussions at any time by providing written notice to the other.
[The following provisions of this letter are binding and survive termination: Section __ (Confidentiality) and Section __ (Exclusivity). Include this line only if you have binding survival clauses; see the carve-out section below.]
__________________________
[Party A Name, Title, Date]
__________________________
[Party B Name, Title, Date]
Two things to flag as you fill this in. The non-binding paragraph is the single most important part of the document; weakening it can turn the whole letter into an enforceable contract. The optional carve-out line only belongs there if you actually want confidentiality or exclusivity to be enforceable during negotiations.
Word Choices That Keep the Letter Non-Binding
Courts do not care what you titled the document. They read the language and ask whether the parties intended to be bound. If the letter contains the essential terms and nothing that expressly disclaims enforceability, a court can treat it as a binding contract, even if both sides planned to sign a “fuller agreement” later.
To keep the letter non-binding, write it the way lawyers who draft these for a living write them:
- Use “intend to” instead of “shall” or “agree to.” Words like “shall,” “agree,” and “undertake” signal binding commitment. Swap them for “intend to,” “expect to,” or “anticipate.”
- Say “participants” instead of “parties.” “Parties” carries contractual connotations; “participants” signals informality.
- Include an explicit disclaimer. A sentence like “This letter is a statement of mutual intention and is not intended to be legally binding” is far stronger than the common but weaker “this is not intended to be a final contract.”
- Reserve the right to walk away. State plainly that neither side is obligated to sign a binding agreement and that either side can end discussions at any time. Without this reservation, the absence of an exit ramp pushes courts toward enforceability.
Letters of intent filed with the SEC follow the same pattern. A typical disclaimer reads: “This LOI is a statement of mutual intention; it is not intended to be legally binding, and does not constitute a binding contractual commitment with respect to the transaction.”2U.S. Securities and Exchange Commission. Non-Binding Letter of Intent That same document then carves out specific paragraphs, usually confidentiality, exclusivity, and expenses, as the only binding portions, making the distinction unmistakable.
Clauses That Can Stay Enforceable
Even when the overall letter is non-binding, certain provisions are frequently carved out as enforceable on their own. These protect both sides during negotiations and are standard in business transactions of any meaningful size.
- Confidentiality. Each side agrees not to disclose information learned during negotiations. Without it, sharing financial records or proprietary data with a potential partner carries obvious risk.
- Exclusivity, also called a no-shop. One or both sides agree not to pursue the same deal with others for a set period. Common in acquisitions, where a buyer needs time to review the target’s books without competing offers in play.
- Expense allocation. Each side bears its own legal, accounting, and advisory costs. Spelling this out avoids a fight if the deal falls apart.
- Termination. State how the letter ends, whether by a fixed expiration, written notice, or both. Thirty days’ written notice is a common default. Say clearly which obligations survive, particularly confidentiality.
If you include any of these carve-outs, label them explicitly. The cleanest approach is to number every section and state in the non-binding paragraph exactly which sections are binding. Mixing binding and non-binding language without clear labels invites litigation.
Signing and Delivering the Letter
Both sides should sign, with each signature accompanied by the signer’s printed name, title, and date. If someone is signing on behalf of a business, confirm they have authority to do so. A signature from someone without that authority may not bind the organization.
You do not have to use pen and paper. Under federal law, an electronic signature carries the same legal weight as a handwritten one for any transaction affecting interstate commerce, and a record cannot be denied enforceability solely because it is in electronic form.3Office of the Law Revision Counsel. 15 USC 7001 – General Rule of Validity Secure digital signature platforms also produce timestamped logs showing when each party viewed and signed, which creates a cleaner audit trail than a scanned PDF.
If you prefer paper, certified mail with a return receipt gives you a delivery record showing the recipient’s signature upon receipt.4United States Postal Service. Certified Mail – The Basics That matters less for a cooperative negotiation, but if the relationship sours later, proof the other side received the document eliminates one line of dispute.
Once everyone has signed, distribute a fully executed copy to each participant so both sides have their own reference during the formal contract negotiations that follow.