Head of Terms Agreement
A heads of terms agreement is a document that sets out the main terms of a commercial agreement reached between two parties in a transaction. Heads of terms can also be referred to as Letters of Intent or Memorandum of Understanding.
Whilst parties often wish to record the fact that they have reached an agreement with regards to a particular deal, or aspects of, they do not wish to fully commit until all negotiations and discussed have been completed.
For this reason, heads of terms agreements are commonly used, but you should be aware that this may not be a legally binding document.
The Purpose Of Heads Of Terms
Heads of Terms, Letters of Intent, Memoranda of Understanding, Heads of Agreement, all serve the same purpose in that they set out key terms or principles that have been decided by parties and set the ‘tone’ to more detailed discussions for a larger agreement, say a loan, supply arrangement, service contract or company acquisition.
Advantages of heads of terms agreements:
- Helps to remove misunderstandings
- Saves time in negotiations.
- Allows all parties to assess whether they should enter into more formal negotiations, before incurring costs and time of management and professionals.
- Helps to provide a guide to timescales of discussions.
- Could be necessary as a reference to third parties, i.e. board of directors, professional advisors or regulatory bodies.
If not used in the correct circumstances, heads of terms agreements can also have their disadvantages, and can unintentionally tie parties into terms that they otherwise would not wish. It is not always necessary to enter into heads of terms, either because the agreement is simple enough, or because there isn’t sufficient time and parties will end up agreeing to the same terms twice.
Not legally binding!
Heads of terms are not typically considered to be legally binding and will usually state this within the document.
Parties are therefore replying on each other’s moral obligation to commit to ongoing negotiations on the terms that have been ‘agreed’.
It does, however, suit both parties to include some clauses within the heads of terms that do carry some legal weight, for example confidentiality or exclusivity.
To avoid any issues at a later stage, it is important that the heads of terms clearly state the intentions of both parties and state what is, and is not, legally binding.
A Recent Legal Case
In a recent legal case, the High Court decided that a Heads of Terms of Proposed Agreement did not create a lease agreement that was legally binding. The judge looked at whether there was an intention to create legal relations and if both parties had agreed the terms that are essential for a legally binding agreement. Under the heads of terms in question, the parties had agreed “not to enter into negotiations with third parties to the detriment of the terms contained herein” until after a certain date. Both parties had agreed that this clause was binding, but the judge felt that by definition, that meant the rest of the heads of terms must be non-binding.
This meant that the defendant was free to negotiate with third parties after the date stated, which would not be possible if they had already entered into a binding lease with the claimant. In addition, an earlier draft of the document required both parties to adhere to “all the terms, pricing and conditions of these Heads of Terms until the Final Agreement is accepted and signed”.
By removing this clause from the signed version and replacing it with the lockout clause, the judge felt that the parties were only agreeing to a period of exclusive negotiation and that the rest of the HoT was not binding.
The Heads of Terms in this case also contained a number of provisions, but it was difficult to understand which would be implied in the actual transaction, therefore bespoke drafting of the HoT should have been implemented.
This case was a good example, because the judge not only looked at the wording of the Heads of Terms, but also the timeline and details of all dealings between both parties.
By doing this, it was ascertained that the parties did not intend to enter into a contract, and that the absence of the term “subject to contract” had no impact in this case.
When entering into any arrangement, which may be called Heads of Terms, Heads of Agreement or Memorandum of Understanding, you should be very careful.
As this recent legal case demonstrates, the legality of these documents can be called into question in future, and a court will look at all relevant communications to reach a decision.
Get In Touch
If you are unsure as to if you will be held liable for a term in a contract and would like to discuss this, please call 01603 319034 or email: info@jacksonscrs.co.uk for a free no obligation chat about your needs and how we can help.
