Table of Contents
In Short
- What is a Heads of Agreement? A preliminary document outlining key terms of a deal, often non-binding but with some binding clauses like confidentiality or exclusivity.
- Key clauses to review: Pay attention to binding clauses such as confidentiality, exclusivity, and intellectual property, which protect your business interests.
- Risks: Premature commitments, overlooked details, insufficient protection, and unclear exit strategies can create pitfalls.
Tips for Businesses
When negotiating a Heads of Agreement, clearly distinguish between binding and non-binding clauses. Ensure binding clauses protect your business interests, particularly around confidentiality and exclusivity. Avoid premature commitments by keeping terms flexible and ensuring sufficient due diligence before finalising a formal agreement. Always seek legal advice to safeguard your position.
As a small business owner, you may find yourself negotiating complex business deals. At the outset of these negotiations, you may be asked to negotiate and sign a Heads of Agreement (also known as a Letter of Intent or a Term Sheet). In the first instance, it’s essential to understand whether the Heads of Agreement is legally binding, part-binding, or non-binding. Even if the document is legally binding, it may still have legal implications further down the line, such as in the event of a dispute.
What Is a Heads of Agreement?
A heads-of-agreement is a document that outlines the key terms of a proposed agreement between you and the other party. It is often used to streamline further negotiations. It can help ensure that the key terms of the deal are agreed upon before signing a more substantial contract. As mentioned above, the document isn’t often intended to be legally binding.
However, some clauses may be legally binding. Therefore, it is essential to read the terms of the Heads of Agreement carefully to confirm whether any of them are intended to be legally binding.
It is important to note that, as this document is signed in the early stages of the negotiation process, some aspects of the commercial details may be subject to change due to further negotiations and the due diligence process. In most cases, the commercial terms set out in the Heads of Agreement are non-binding. However, the document has specific provisions that the parties will agree are legally binding.
Common Legally Binding Clauses
To confirm the binding nature of the Heads of Agreement, check whether a clause within the document sets out which clauses (if any) are enforceable. The following clauses are often intended to be legally binding within a Heads of Agreement.
Confidentiality Clause
The confidentiality clause within the Heads of Agreement is a clause that you will want to make sure is legally binding, especially if you haven’t already signed a separate Non-Disclosure Agreement with the other party. It is often the case that the parties will be sharing sensitive business information during negotiations. Therefore, a robust confidentiality clause should be included.
Proprietary information and trade secrets are often a small business’s key competitive advantage. A well-drafted confidentiality clause ensures that your business ideas and essential business information remain protected. It also ensures that any financial information you share is private and that any intellectual property or data is not shared improperly. This clause should be explicitly stated as binding to protect your business interests.
Exclusivity Clause
An exclusivity clause prevents the parties from negotiating with other potential partners for an agreed-upon period.
Key elements of an exclusivity clause include the duration of the exclusivity period, what activities are included within the scope of exclusivity, and the consequences of breaching exclusivity. Exclusivity clauses can be both beneficial and risky.
This fact sheet outlines how your business can manage a dispute.
The benefit is that they provide assurance that resources invested by you in negotiations won’t be wasted due to the other party pursuing alternative deals. However, the risk is they limit your ability to explore other opportunities during the specified exclusivity period if the exclusivity clause applies mutually.
Intellectual Property Clauses
Often, intellectual property won’t be created before the formal contract is finalised. However, this may happen in some cases. In addition, you may need to exchange some intellectual property with the other side during the Heads of Agreement phase of negotiations.
Non-Binding Clauses
The rest of the agreement is usually non-binding. However, it is equally important that you review and understand the non-binding terms. Ensure that the commercial terms align with your discussions with the other party.
The commercial terms may include:
- purchase price;
- payment terms;
- key deliverables/milestones; and
- completion timelines.
These terms are often subject to further negotiation and due diligence. As a small business owner, it is crucial to understand that these terms are not entirely set in stone at this stage.
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Potential Risks
The following are potential risks to be aware of while negotiating and entering into a Heads of Agreement:
- Premature Commitment: Be cautious about committing to terms too early in the process. Ensure you have the flexibility to adjust terms as more information becomes available. You don’t want to be committed to terms you agreed to before having the necessary information to make a decision or before the opportunity arises to do due diligence on the other party;
- Overlooking important details: In the rush to reach an agreement, it’s easy to overlook crucial details. Take the time to thoroughly review all terms. Ensure you understand what obligations you are agreeing to at this stage;
- Exit Strategies: Ensure clear provisions for terminating negotiations are included within the agreement if necessary. Consider reasons why you may no longer wish to work with the other party or when you may want to terminate the exclusivity period (if any). You do not want to be locked into discussions indefinitely, especially if it appears that you may not be able to agree with the other party; and
- Insufficient Protection: Ensure that confidentiality and intellectual property protections are robust enough to safeguard your business interests beyond negotiations. Your hard work, ideas, and business secrets should be protected and not be disclosed, shared, or transferred, regardless of whether a further agreement is entered into.
Key Takeaways
Heads of Agreement are crucial documents in business negotiations, particularly for small businesses engaging in significant transactions. While not entirely legally binding, they set the stage for future negotiations and can have substantial legal implications.
Key points to remember include:
- understand which clauses are binding and which are non-binding;
- pay particular attention to confidentiality and exclusivity clauses;
- structure your Heads of Agreement carefully, ensuring all key points are covered; and
- be aware of potential pitfalls and negotiate strategically to protect your interests.
If you need help with Heads of Agreement, LegalVision’s experienced contracts lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So, call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If a party breaches a binding clause, such as a confidentiality or exclusivity clause, the other party may have grounds for legal action. A court could award damages or order specific performance.
While Heads of Agreement are typically non-binding, courts may enforce them as binding contracts if they contain all the elements of a contract and both parties clearly intend for them to be binding. It’s crucial to clearly state which parts are intended to be binding to avoid confusion.
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