Heads of agreement, also known as heads of terms, memorandum of understanding, or letter of intent, are pre-contractual documents that outline the key terms of a potential agreement between two parties. These documents are often used in commercial negotiations to establish a framework for further discussions and to provide certainty to the parties involved. However, the question remains: are heads of agreement legally binding?
In general, heads of agreement are not legally binding in the sense that they do not create a contractual relationship between the parties. They are typically viewed as a way to document the intentions of the parties to negotiate a contract in good faith and to signal their commitment to such negotiations. While heads of agreement may contain some binding provisions, such as confidentiality obligations or exclusivity clauses, they are usually non-binding as a whole.
The reason why heads of agreement are not considered legally binding is that they lack key elements that are required for a contract to be enforceable. These elements include offer, acceptance, consideration, and intention to create legal relations. A head of agreement may contain some or all of these elements, but they are often subject to further negotiation and formalisation before they can be legally binding.
That being said, it is important to note that a well-drafted head of agreement can provide a strong framework for future negotiations and can help to avoid disputes. By setting out the main terms of the agreement upfront, the parties can establish a shared understanding of what they are trying to achieve and can focus their negotiations on the more detailed aspects of the contract. Additionally, a well-drafted head of agreement can help to identify and resolve any potential issues or areas of disagreement before they become more difficult to address.
In some cases, the parties may choose to make certain provisions in a head of agreement legally binding by including a separate agreement to that effect. For example, if the parties wish to bind themselves to confidentiality obligations or exclusivity clauses, they may include a separate agreement that expressly states that these provisions are binding and enforceable. However, such an agreement would need to be clear, specific, and supported by consideration in order to be enforceable.
In conclusion, heads of agreement are not usually legally binding. They are generally seen as a way to establish a framework for further negotiations and to provide certainty to the parties involved. However, a well-drafted head of agreement can be a useful tool in commercial negotiations and can help to avoid disputes. If the parties wish to make certain provisions binding, they may need to include a separate agreement that meets the requirements for a contract to be enforceable.
