What is a Heads of Agreement? (2024 Update)

The lead up to signing a formal contract can be tense and nerve-wracking for businesses who aren’t always sure of what they’re getting into. To help parties negotiate and enter legal relations with confidence, a Heads of Agreement document can clarify intentions before you sign a legally binding contract. In this article, we’ll explain what a Heads of Agreement is and how using one will benefit your business.

Key points

• A Heads of Agreement confirms the intentions of two parties and the proposed terms of a legally-binding contract
• This helps ensure the parties are both on the same page
• It can also instil trust when entering into the final contract

Formalising discussions

When two parties enter into negotiation for an agreement, such as the sale of a business, the parties should seek to formalise the terms of the discussion prior to signing a legally binding document. This gives the parties a chance to process what fulfilling the terms of the contract will mean, and clarify anything before it is too late to make changes. If you are interested in signing an agreement with another party, it is important to record the terms that have been agreed upon in order to protect your business assets and resolve future disputes.

What is a Heads of Agreement?

A Heads of Agreement is a non-legally binding document that records the proposed terms during the negotiation phase. It is an effective precursor to a legally binding document, expressing exactly what you will include in a proposed agreement and what you will leave out.

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Why use it?

While not enforcing both parties to reach an agreement, the document is a gesture of good faith by evidencing both parties commitment to proceed with a binding agreement. The Heads of Agreement ensures that both parties can continue negotiating the final terms of the agreement, make the relevant enquiries before reaching a conclusive decision and exclude third parties from entering into negotiations.

Other key reasons why parties should use a Head of Agreement include:

• It’s a mechanism for resolving disputes to clarify to both parties what the end Agreement will include
• Protects business assets, information and employees from the negotiating party
• Outlines the parties key roles and responsibilities
• Formalises and streamlines the negotiation process

What does a Heads of Agreement include?

• Details of the proposed agreement
• The key obligations of both parties
• Target completion date
• Consideration for the proposed agreement
• Options to include legally binding obligations of confidentiality, non-solicitation and/or exclusivity

When are they binding?

Although a Heads of Agreement is non-binding, there have been circumstances where a court has determined that a Heads of Agreement will be enforceable. For the document to be legally binding, the Heads of Agreement must:

• Explicitly state that the parties intended to be bound by the Heads of Agreement
• Signed by both parties and described as a ‘Heads of Agreement’
• Drafted under the supervision of solicitors from both parties
• Inclusive of all essential terms and conditions
• Include a clause stating how unsettled matters will be resolved.