A Heads of Agreement, properly drafted, is a non-binding document which sets out the key terms of a proposed agreement between parties.
It is commonly used as part of the process of negotiating commercial transactions for example, the purchase of a business.
The idea is that the parties sign the Heads of Agreement at the pre-contractual stage of negotiations, with the intention of the parties continuing negotiations with the involvement of lawyers and accountants, and ultimately entering into a binding contract.
In general, an Heads of Agreement can be effective to provide:
a framework for the parties to negotiate a final contract; a record of key terms agreed on to date; evidence of a party's commitment for the benefit of third parties such as banks or potential investors; a mechanism for dealing with pre-contractual issues such as exclusivity, confidentiality, due diligence and intellectual property; a degree of confidence that a deal is probable before the parties incur further expense.
Is a Heads of Agreement legally binding?
Some people immediately assume that a Heads of Agreement is legally binding, while others assume it is not.
The reality is that a Heads of Agreement could be either binding or not. However, generally the intention is that the Heads of Agreement is not binding in relation to the "key terms of a proposed agreement between parties", but is binding in relation to such matters as "exclusivity, confidentiality, due diligence and intellectual property".
