heads of terms

Often, the terms and conditions of a proposed transaction involve significant complexity. To assist the process by which parties reach formal agreement, it is open to the potential contracting parties to prepare heads of terms as an interim step to reach formal agreement. Accordingly, rather than starting with detailed and potentially lengthy contracts, short heads of terms (of a single page or a few pages) may be produced for the purposes of facilitating negotiation. Once the central terms are agreed, the parties proceed to the preparation of formal contracts.   

In this way, time negotiating the terms of the final contract is usually reduced as the broad terms of the agreement have been reached prior to production of detailed legal documentation.

There are other reasons why parties might elect to approach a transaction by preparing Heads of Terms first. The parties wish to take a staged approach to ensure that they have a commercial meeting of the minds prior to incurring the expense of preparation of legal documentation. Heads of Terms may also serve as an aide-mémoire during the course of preparing formal legal documentation.

Nature of Heads of Terms

Heads of Terms are not intended to be an exhaustive statement of the intended transaction. To do otherwise would defeat the purpose of the preparation of the document in the first instance.  They are usually prepared to set out the commercial agreement between the parties intending to enter into a contract at a later date. The details of the specific requirements are left until the main duties and responsibilities of the parties have been agreed.

In English law and commerce, Heads of Terms are also frequently named ‘Memorandum of Understanding’, ‘Letter of Intent’ and ‘Heads of Agreement’. The title of the document is not the paramount issue. Such documents serve a commercial purpose, but may have legal consequences.

Legally Binding

Whether or not Heads of Terms are legally binding or not depends on whether the elements of a binding contract are present - offer, acceptance, consideration, intention to be legally bound and an absence of vitiating factors.

Properly Drafted Heads of Terms

Professionally drafted Heads of Terms will state whether or not the heads of terms will be binding or not.  Indeed, the document may provide that certain provisions, such as confidentiality, the jurisdiction in which disputes will be heard and the locus contractus will be legally binding, and the balance of the document is not intended to be legally binding. Unsigned documents marked ‘subject to contract’ in the vast majority of cases will not be binding, however words or conduct evidencing that the parties considered themselves bound by the terms set out in the document may result in the document becoming legally binding.

By preparing Heads of Terms, the intending contracting parties are able to work towards a commercial agreement informally (with or without the involvement of lawyers), with a view to instructing lawyers at a later date to draft the formal contractual documentation that will be legally binding based on the heads of agreement.