Are Heads of Agreement Enforceable in England and Wales?

Contract negotiations can be a long and difficult process. Business owners work hard to agree on the fundamental points of a contract. A document known as a heads of agreement often records these fundamental points. You will usually draft a heads of agreement before you and your business partners enter into a final contract. Heads of agreement can be an important document that helps businesses identify the key terms of a contract. There are certain circumstances when you can and cannot enforce a heads of agreement in England and Wales. This article will explain what a heads of agreement is. It will also answer whether heads of agreement are enforceable in England and Wales.

What is a Heads of Agreement?

Also known as a term sheet or a letter of intent, a heads of agreement is a document that details the essential terms of an arrangement made between two or more parties. Businesses will typically use a heads of agreement when one business liaises with another to provide goods or services.

Heads of agreement have two key purposes: 

1. document what both parties have agreed to before they enter into any contractual relationship; and
2. show that both parties had an intention to be bound by the terms laid out in the heads of agreement. 

Additionally, you cannot enforce a contract unless these two conditions are satisfied:

1. contracts must be clear and understandable; and 
2. both parties must show their intention to deliver on what they agreed.

Therefore, lawyers will often draft a heads of agreement before parties sign a legally binding agreement. This enables both parties to negotiate the main terms of a deal through the heads of agreement.

What are the Benefits of a Heads of Agreement?

Detailing the basic terms of an arrangement, a heads of agreement will typically only include the basic principles of an agreement. 

A heads of agreement provides certain benefits to both parties, including: 

• basic guidance on negotiating a formal agreement;
• evidence that both parties are here to create a legally binding contract;
• clarity over the type of agreement parties are looking to build, whether that’s a contract for goods or services;
• proof to other servicers, lenders, and creditors that both parties are serious about creating a legal arrangement; 
• help legal executives negotiate and agree upon more finite contract terms; and 
• can, in some circumstances, help parties enforce the performance of obligations and contract terms. 

Are Your Heads of Agreement Enforceable? 

Typically, a heads of agreement does not constitute a legally enforceable contract. However, there are some circumstances where you may have binding obligations if you sign a heads of agreement. 

Confidentiality

Heads of agreement are sensitive documents that contain commercial arrangements that parties should not disclose to anyone outside the agreement. For that reason, confidentiality terms are almost always included in a heads of agreement. This ensures privacy and commercial confidentiality between you and your business partner. However, that can place a legally binding obligation on you, other parties and the lawyers negotiating the arrangement not to disclose the key terms of the heads of agreement.

Exclusivity

Similarly, you can insert exclusivity terms into the agreement. These can legally require you and your business partner to negotiate only with each other to ensure that the deal goes ahead without any hiccups or wasted time. 

Closing Costs

Heads of agreement can also require business owners to pay administration or lawyer fees at the conclusion of the transaction. It is wise to note that you cannot enforce these fees if you do not finalise a deal. 

Negotiation

Other heads of agreement may include language that requires you to negotiate in good faith with other parties to the agreement. By imposing this requirement, parties seek to ensure that the transaction goes smoothly. Additionally, the other party may enforce damages if one person walks away from the negotiation table, breaching their obligation. 

What Happens After Signing a Heads of Agreement? 

More often than not, a heads of agreement will state that it is ‘non-binding’, which means the deal is not finished after you and your business partner have signed the term sheet. 

You will need to, at a later date, execute a range of other commercial contracts for the proposed transaction to come into force. Transaction lawyers will prepare and produce those documents. They will also negotiate the provisions in each commercial contract and perform due diligence, or background checks, on the other parties to the agreement. As part of this process, lawyers may undertake assessments of creditworthiness, solvency or fraud. They do this to ensure that each party to the agreement does not misrepresent themselves. Note that your business partners will also likely complete background checks on you. 

Upon execution of these documents, the overall agreement will become live on an agreed date, and the provisions of the contract documents will then bind the parties. These provisions will also reflect the key terms set out in the heads of the agreement. Businesses can then rely on a legally binding document that initiates and enforces the obligations outlined in the term sheet onto other parties. 

Key Takeaways 

A heads of agreement, otherwise known as a term sheet, details the major points of a commercial contract. The purpose of using a heads of agreement is to help parties create a legally enforceable contract. Both parties can use the document to identify that they had intentions to create legal relations and demonstrate the contract’s clarity regarding its terms. While not binding themselves as a legally enforceable document, a heads of agreement can contain provisions that bind business owners. 

Some of those conditions can include: 

• keeping particular information confidential;
• ensure you deal exclusively with other parties to the transaction; 
• negotiate in good faith with other parties; and
•  and agree to pay closing costs.

If you need more advice on drafting or negotiating a heads of agreement, our experienced commercial 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 on how you can structure a heads of agreement. Call us today on [number] or visit our membership page. 

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