Letter of Agreement

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A letter of agreement goes by many other names: letter of authorization, basic ordering agreement, collective bargaining agreement, letter of award, express agreement, or sales agreement. Clearly, this legal document can be used for a variety of purposes.

At its core, a letter of agreement formalizes an agreed-upon situation between two parties. This could cover anything from an agreement from Party A to sell her car to Party B, a subleasing agreement, or an agreement to perform a service in exchange for another service. As with all legal documents, it is best to formalize the agreement in writing with signatures from both or all parties.

How is a Letter of Agreement Used?

A letter of agreement can be added to any contract as a method of formalizing the arrangement between both or all parties. It can make sure that all parties are on the same page regarding the terms of the contract. The terms of the contract are, most often, services in exchange for payment, but can formalize other details as well.

Letters of agreement allow parties to formalize contract details through an exchange of writing, if they cannot meet in person, and can also solidify legal discussions that lead to a contract agreement. The document can also simplify the terms of a contract which might otherwise be in unreadable “legalese.” This document can begin discussions around a contract, solidify terms for discussion of a contract, or protect parties from misunderstanding terms in a contract. A letter of agreement can also complete changes to a contract, including for a specified amount of time. Between businesses, especially large businesses, a letter of agreement formalizes the relationship between the parties, not just the terms of the contract. This way, the two corporations know how to interact with each other in the event of a dispute.

A letter of agreement can be as legally binding as a contract, and is often viewed as a contract in itself when businesses are involved. However, it is not inherently legally binding in all cases – individual state laws can tell you more about the legal nature of a letter of agreement.

When is a Letter of Agreement Invalid?

As with many legal documents, oral contracts might be valid in many states, but are difficult to prove in legal disputes, so it is best to have the documents in writing, with signatures from all parties.

Sometimes, one or both parties decide to cancel the letter of agreement. This could be because one party wants to leave the contract negotiation, and they use the letter of agreement to define terms of canceling their pre-arranged relationship. The cancellation notice must include one party’s cancelling action, a copy of the Letter of Agreement, and the date of cancellation. The canceling party may include why they decided to cancel the letter of agreement and offer to reopen discussions or negotiations at a later date, but it is not legally necessary. After the cancelation notice, the letter of agreement is no longer valid.