A client recently received a letter titled “Memorandum of Understanding” (also known as a “Letter of Intent’) that was created by a hospital system to outline the intent of both parties. She asked whether she would be bound to the hospital if she signed it. A summary of the contents of the letter is below.
We are very pleased to outline our offer of employment to you at MegaHospital, Inc (“Company”). This offer is subject to the general terms and conditions set forth below and our Company’s policies and procedures:
1. Your start date will be January 1, 20XX, provided that you have met all licensing and credentialing requirements
2. You will work as a HOSPITALIST physician at Company
3. You will work a minimum of 10 clinical hours per day, 4 days per week.
4. You will work a minimum of 3 weekend days per month.
5. You agree to be on call 2 nights per week.
6. You shall devote your full time, efforts and resources to the affairs of the Company
7. You will be paid $200,000 per year on a biweekly schedule. As a highly-paid employee, you are exempt from receiving overtime.
8. You will be eligible for the benefits program offered to other HOSPITALIST physicians.
9. This offer is contingent on you passing a background check, obtaining medical licensing and hospital credentialing, and signing an official employment agreement.
The contents of this letter and any statements made during any conversations with Company representatives do not constitute the terms of an employment contract, either express or implied. Company reserves the right to change the terms of this memorandum or any of its policies at any time. To accept this offer and to receive a formal employment contract, please sign and return this letter within 3 business days of receipt.
Signed: ___________________________________________________
What Is a Memorandum of Understanding/Letter of Intent?
In general, under US law, a memorandum of understanding (MOU), a letter of intent (LOI), a memorandum of agreement (MOA), and any similar types of agreements serve essentially the same function. All are intended to be nonbinding documents that set forth the “ground rules” and outline the essential terms of a potential relationship before the parties enter into a binding contract. They include basic expectations and obligations upon which both parties agree before entering into a formal agreement. In a contract for services such as a physician employment agreement, a MOU/LOI will often include base compensation, work locations, work hours, any on-call duties, and basic benefits.
What Is the Purpose of a Memorandum of Understanding/Letter of Intent?
The MOU/LOI is more commonly seen in commercial contracts such as in a major business transaction or a major project. MOUs/LOIs are sometimes seen in physician contracts with academic programs, but are usually unnecessary in a contract for physician services. In most cases, physicians interview with a hospital or employer and if the interview goes well, the physician is offered a formal written agreement. An MOU/LOI amounts to an intermediate step that serves little additional purpose. It simply demonstrates that each party agrees to the basic terms of the formal contract, provides evidence that each party is interesting in negotiating further, and may help to create goodwill between the parties. From a practical standpoint, most of these issues should have been addressed during the interview and follow-up conversations.
Memoranda of Understanding or Letters of Intent are almost always non-binding, meaning that even if a physician signs an MOU/LOI, either party may still walk away from the formal agreement without being accused of breach of contract. In fact, the terms of an MOU/LOI often state that the document does not create a formal contract. For example, see the language in the sample above.
Even though MOU/LOIs probably will not create an obligation on either party, once the parties have agreed upon basic provisions, it becomes difficult for either party to dispute those agreed-upon terms in future negotiation. For example, if the parties sign an MOU/LOI that the annual compensation in the contract at issue will be $200,000, it will be difficult for either party to demand higher or lower compensation in the formal contract without appearing to have bad faith intent and losing substantial goodwill in the negotiation.
Is the Language in a Memorandum of Understanding/Letter of Intent Enforceable?
Probably not, but it depends.
If the MOU/LOI contains specific language stating that the terms “do not create an enforceable agreement,” then the MOU/LOI will likely be considered a non-binding agreement. However, this general rule does not apply in every case and even the terms of a non-binding agreement may be persuasive when creating or negotiating the terms of an enforceable contract.
If the language in the MOU/LOI is ambiguous, the terms in the document alone may be considered a binding contract by the courts. If there is ambiguity whether a Memorandum of Understanding may form an enforceable contract, the law generally construes such ambiguity against the party drafting the contract. See, e.g., AIU Ins. Co. v. Superior Court, 799 P. 2d 1253 (Cal Supreme Court 1990) (“ambiguous language is construed against the party who caused the uncertainty to exist”).
In one case involving anticipated merger of two companies, a Memorandum of Understanding stated that a “general understanding [had] been reached” contingent on “preparation of the definitive agreement for the proposed combination in form and content satisfactory to both parties and their respective counsel” and “approval of such definitive agreement by the Board of Directors ….” When one company withdrew from negotiations, the other company sued for breach of contract. The court held that the “document and relevant circumstances surrounding its adoption must be considered in making a determination of the parties’ intention.” Because it was possible that the parties intended to create a binding contract, the court ruled that the Memorandum of Understanding may not have been non-binding and that the issue must go to trial. Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F. 2d 584 (1976).
If a MOU/LOI contains sufficient details, it may be considered binding on the parties even if there was initially no intent for the document to create an enforceable contract. The case of AJ Richard & Sons v. Forest City Ratner Cos., LLC, 2019 NY Slip Op 30215, (NY Supreme Court 2019) cited language from multiple other New York cases reiterating this concept:
- A contract does not necessarily lack all effect merely because it expresses the idea that something is left to future agreement (Conopco, Inc., 190 AD2d at 588; see also Four Seasons Hotels, 127 AD2d at 317).
- Where an agreement contains all of the essential terms of the contract, “the fact that the parties intended to negotiate a `fuller agreement’ does not negate its legal effect” (Conopco, Inc., 190 AD2d at 588).
- An agreement is not rendered ineffective simply because certain non-material terms are left for future negotiation or because the agreement states that the parties will execute a further more formal agreement (see RES Exhibit Servs., LLC v Genesis Vision, Inc., 155 AD3d 1515, 1518 [4th Dept 2017]; Sustainable PTE Ltd. v Peak Venture Partners LLC, 150 AD3d 554, 555 [1st Dept 2017])
- Where the parties have manifested [an] intention to make an enforceable agreement, the mere fact of open terms will not permit them to disavow it. (Teachers Ins. & Annuity Assn. of Am. v Tribune Co., 670 F Supp 491, 502 [SD NY 1987]).
Takeaways
- A MOU/LOI in a physician employment agreement is probably is not enforceable – especially if there is language in the document specifically stating that intent. Additionally, if a party wished to enforce the provisions of a MOU/LOI, it would have to bring a claim for damages in court which – in the case of a physician employment agreement – would likely destroy the working relationship between the parties.
- Keep in mind that if a MOU/LOI contains all of the essential elements of a contractual agreement, there is still a possibility that a court could enforce the terms even if parties initially intended otherwise.
Want more information on contracts? Read other articles on the Contracts section of this blog.
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