What Is a Heads of Agreement?
Heads Of Terms : A heads of agreement is an agreement that is not binding and outlines the fundamental guidelines for a preliminary partnership arrangement or transaction. Also called “heads of agreement, “heads of terms,” or ” letter of intent,” the heads of agreement is the initial step on the way to a legally binding contract, and provides a framework on the duties and obligations of all parties in an eventual partnership prior to the time that legally binding agreements are created. This type of document is typically utilized in commercial transactions, like buying a company.
In the context of business, “heads of agreement” is most often used across Australia, New Zealand, and the United Kingdom.
Understanding a Heads of Agreements
Heads of Agreement is only intended to serve as an introductory document to the fundamental details of a transaction, or partnership. It’s a preliminary stage of negotiations. It is designed so that the heads of agreement will not be sufficient to include all the specifics of the binding formal agreement. The lack of details is also its strength, as it is less likely for the two parties to come across things they don’t reach an agreement on.
After both parties reach an agreement on the partnership or transaction, and have agreed to sign a heads-of-agreement document then the next step involves having accountants and lawyers involved to work out the specifics. The details can contain a variety of pre-conditions which must be met prior to a final agreement being reached. Following that, the next step is signing an obligation-based contract, although any heads of agreement could end at any point by either party , with a few limitations.
Heads of Agreement Purposes
A heads of arrangement can give both parties to an agreement or partnership with the following information:
- The evidence for both parties suggests that a deal is possible thus neither party is wasting time or money
- Guidelines for negotiating formal agreements
- A list of all accepted conditions
- A proof to investors or lenders that both parties have signed the terms of a formal agreement
- A guideline and tool to address confidentiality and due diligence intellectual property and exclusivity along with other issues that arise prior to contracting.
Heads of Agreement: Binding or Not?
Heads of agreements may be non-binding or binding, according to the language of the agreement but they are not typically obligatory. However, certain aspects like intellectual property confidentiality, exclusivity, confidentiality and non-solicitation clauses, are likely to be binding, but only if the timeframes are within a reasonable timeframe. If a heads-of-agreement document is designed to ensure that it’s binding, it could cause problems.
Because the majority of heads of agreement do not become legally binding, the remedies in case of non-compliance by one side are limited. They only apply to legally binding clauses mentioned above. If there’s a violation of these terms and conditions by one of the parties one party, the other can file for an injunction or equity relief, damages or a specific performance.
