Why Heads of Terms really do matter

A preliminary agreement, commonly referred to as Heads of Terms (HoTs), is often taken less seriously than a final agreement, because it is viewed as indicative and not legally binding. This misconception can create potential risks for any business entering into a new relationship or project. A HoTs or heads of agreement, letter of intent, term sheet or memorandum of understanding, is a document which sets out the terms of a commercial transaction agreed between parties during negotiations.

Whilst a HoTs, if drafted appropriately, is never fully non-binding, it is usual for certain key terms to be binding while the remainder are not.

It is important HoTs make clear which terms are not binding, otherwise and crucially, subject to the rules of English contract law, they will all be binding.

What should be binding?

• Governing Law and jurisdiction: this will provide clear enforcement options and prevent unwanted litigation abroad.
• Confidentiality: to protect your confidential information in the lead-up to the final agreement being signed, this can be crucial, particularly if the intended project does not proceed.
• Exclusivity: to prevent the other side from using your business as a “negotiating chip”.
• Costs, exclusion and limitation of liability: parties should not have excessive liability to each other and bear their own costs at this stage.

 What should not be binding?

Most other provisions, including:

• the mechanics and nature of the transaction;
• monetary figures;
• the timetable and/or milestones;
• consideration details and payment mechanisms;
• the party responsible for drafting which documents;
• conditions of the deal; and
• due diligence.

However, this does not mean these should not be adhered to in the final agreement, or that they are not important. Parties will continue to negotiate and resolve details without creating restrictive and unintended obligations which benefit neither party.

The Hamlins team has expertise drafting and negotiating preliminary agreements across multiple sectors including commercial, commercial property, corporate and banking. If you have been asked to sign a HoTs, or need to negotiate one with another party, and would like to find out how we can help you, please contact Matthew Pryke.