Letter agreement: Overview, definition, and example
What is a letter agreement?
A letter agreement is a type of informal contract that outlines the terms and conditions of a deal between two parties in a letter format. It typically serves as a preliminary or less formal arrangement, often used to confirm an understanding or agreement before a more detailed contract is created. It can also function as the full, binding agreement, depending on the intention of the parties.
Why is a letter agreement important?
Letter agreements provide clarity between parties in a simple, concise format, making them ideal for straightforward deals or when speed is critical. They also help create a written record of terms, reducing the chance of misunderstandings or disputes. In some cases, they can be used to create legally binding commitments without the need for a complex contract.
Understanding a letter agreement through an example
Imagine a company agreeing to provide consulting services for a client. Before drafting a full contract, they may use a letter agreement to outline the basic terms—such as scope, timeline, and payment—so both parties can proceed while the detailed contract is being prepared. If both parties sign the letter, it becomes a formal agreement for the terms outlined in the letter.
Example of a letter agreement clause
Here’s how a letter agreement clause may appear in a contract:
"This letter confirms our mutual understanding regarding the consulting services you will provide to [Company Name], beginning on [Start Date] and continuing for a period of [X months/years], at the agreed-upon rate of [Amount]. Both parties intend to execute a more detailed contract by [Date], but this letter serves as confirmation of the terms discussed."
Conclusion
A letter agreement is an efficient way to formalize basic terms between parties without the need for a full, complex contract. It can be used as a binding agreement in some situations or as a placeholder until a more detailed contract is finalized. Businesses should ensure that the letter clearly outlines key terms and that both parties intend to be bound by it, depending on the situation.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.