What Is a Heads of Agreement?
A “heads of state” agreement is a non-binding contract that specifies the fundamental elements of a potential partnership or transaction. Before signing any binding documents, a head of agreement, also known as a “head of terms” or “letter of intent,” is the first step toward a legally binding agreement or contract and outlines the parties’ roles and responsibilities. Commercial transactions, like business purchases, often utilize such paper.
In business, “heads of agreement” is most prevalent in Australia, New Zealand, and the UK.
Understanding the Agreement
A head of agreement document is unnecessary as an introduction to a transaction or partnership. It happens during pre-contract discussions. Heads of agreement cannot encompass all the specifics of a binding formal agreement by design. Although lacking in depth, its strength is that parties are less likely to disagree.
After signing a heads-of-state agreement, attorneys and accountants work out the specifics. Before reaching a final agreement, such details may contain pre-conditions. The next stage is signing a binding contract, although any party with specific restrictions can dissolve heads of agreement.
The purpose of this agreement
Heads of agreement can offer the following to transactional or partnership parties:
- Proof that a deal is likely to save both parties time and money
- Formal agreement negotiation guidelines
- An ongoing list of contractual terms
- Evidence to lenders or investors that both parties have signed a contract
- Our tool and guidelines cover confidentiality, due diligence, intellectual property, exclusivity, and other pre-contractual problems.
Are agreement heads binding?
The language of heads of agreement might make them binding or non-binding, although they are rarely binding. However, intellectual property, exclusivity, secrecy, and non-solicitation terms are obligatory, provided the timeframes are reasonable. A binding agreement might cause issues.
Since most heads of agreements are not enforceable, neither side has many recourses for noncompliance. They only apply to the legally binding clauses above. If one party breaches those contractual obligations, the other may seek an injunction, equitable remedies, damages, or a specific performance.
Conclusion
- An early, non-binding “head of house” agreement sets the stage for a partnership or transaction.
- Though provisional, the agreement is the first step toward a formal accord.
- This agreement is non-binding, but nondisclosure provisions may be.
