Heads of terms are also known as letters of intent, memorandum of understanding, term sheets or heads of agreement. The Heads of Terms are generally contained in a basic document which outlines the main terms of a commercial transaction which have been agreed in principle.
The intention is to outline key terms agreed in principle and to give the parties a structured basis for negotiating the main contract while ensuring that the parties expectations as to the main contract terms are closely aligned at an early stage.
They are generally intended to be non-binding as a whole, but will often include some specific provisions that are intended to be binding. They are generally marked “subject to contract” and often expressly state that the terms are not intended to be legally except as otherwise indicated in the document.
Terms that are often expressly stated as being legally binding include confidentiality provisions, exclusivity terms including any consideration payable in relation to such exclusivity and also boiler plate terms including governing law and jurisdiction.
It is relatively common for the parties to include an exclusivity clause in the Heads of Terms and guidance on whether this would be appropriate is determined by the nature of the proposed commercial transaction and ultimately by instructing solicitors. The purpose of the exclusivity clause is to enable the parties to have an exclusive period within which to conclude the transaction. It effectively prevents any third party entering negotiations with either party to conclude a similar transaction. Depending on the relative negotiating strengths of the parties, a party may request a consideration payment for agreeing to be bound by the terms of an exclusivity or lock-in period.
The advantages of using heads of terms include:
1. They can confirm a moral commitment on both sides to observe the terms agreed.
2. Where a transaction is complex, heads of terms can help focus the negotiations, bring out any misunderstandings and, by highlighting major issues at an early stage, prevent the parties wasting time and money if those issues cannot be resolved. In addition, draft heads of terms can sometimes help parties instruct their respective advisers, and can be a helpful starting point from which their commercial solicitors can ask further questions about the basis for the deal and highlight issues that the parties have not previously considered.
Disadvantages of using heads of terms include:
1. The moral commitment can limit flexibility in the subsequent negotiations.
2. They can, in circumstances where the parties are not advised properly, create a legally binding agreement between the parties even when this is not the parties' intention.
3. The possibility of inadvertently creating obligations that the parties are not yet ready to undertake.
4. Heads of terms can expire and leave a contractual vacuum.
Summerfield Browne Solicitors have offices in the United Kingdom in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough.
