What is a Heads of Agreement?

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 precontractual stage of negotiations, with the intention of the parties continuing negotiations with the involvement of solicitors and accountants, and ultimately entering into a binding contract.

In general, Heads of Agreement can be effective to provide:

  • a framework for the parties to negotiate a final business contract;
  • a record of key terms agreed on the date;
  • evidence of a party’s commitment for the benefit of third parties such as banks or potential investors;
  • a mechanism for dealing with precontractual 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”. 

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