Heads of Agreement: What is Their Purpose and Are They Binding?

What Is a Heads of Agreement?

A "heads of" agreement is a non-binding document that outlines the basic terms of a tentative partnership agreement or transaction. Also known as a "heads of terms," or "letter of intent," a heads of agreement marks the first step on the path to a full legally binding agreement or contract and a guideline for the roles and responsibilities of the parties involved in a potential partnership before any binding documents are drawn up. Such a document is commonly used in commercial transactions, such as the purchase of a business.

As a business term, "heads of agreement" is most commonly used in Australia, New Zealand, and the United Kingdom.

Understanding a Heads of Agreements

A heads of agreement document is only meant to serve as an introductory agreement to the basic terms of a transaction or partnership. It happens during the pre-contractual stage of negotiations. By design, a heads of agreement will not be comprehensive enough to cover all the necessary details involved in a binding formal agreement. But its lack of detail is also its strength; the parties are less likely to find something they do not agree on.

Once both parties come to a broad consensus on a partnership or transaction and have signed a heads of agreement document, the next step entails involving attorneys and accountants to iron out the details. Such details may include a number of pre-conditions that must be satisfied before a final agreement is made. The step after that is the signing of a binding contract, though a heads of agreement may be terminated at any time by either party with some caveats.

Heads of Agreement Purposes

A heads of agreement can provide both parties in a transaction or partnership the following:

• Evidence for both parties that a deal is likely so neither party wastes time or money
• Guidelines for negotiating a formal agreement
• A running list of agreed-to terms
• Proof to lenders or investors that both parties are committed to a formal agreement
• A tool and guidelines for addressing confidentiality, due diligence, intellectual property, exclusivity, as well as other pre-contractual issues

Heads of Agreement: Binding or Not?

Heads of agreement can be binding or non-binding, depending on the language used, though they are not generally binding. That said, some aspects, such as intellectual property, exclusivity, confidentiality, and non-solicitation provisions, tend to be binding, though only if the time-frames are reasonable. If a heads of agreement document is written so that it is binding it can present problems.

Since most aspects of a heads of agreement are not binding, the remedies for non-compliance by either party are few. In fact, they only apply to the legally binding terms listed above. If there is a breach of those binding terms by one party, the other may file for an injunction, equitable relief, damages or specific performance.