What is a heads of agreement?
A heads of agreement is generally a non-binding document prepared in anticipation of entering into a further agreement. The heads of agreement sets out the terms and conditions between the parties who will be subject to the further agreement as well as detailing the intention or purpose of the further agreement and the key terms and conditions that will apply to the transaction. Heads of agreements are usually prepared for various commercial transactions including but not limited to asset sales, land transactions, business contracts, partnerships, investments and majority of contracts with a commercial nature (read our article on the 5 Stages of a Business Sale by following the link).
Is it binding?
Although a heads of agreement is not intended to be binding it is still a legal document and therefore is subject to the principles of contract law. If found in court that the Heads of Agreement satisfies the three elements that constitute a formal contract you may be bound to the obligations in the agreement. For this reason, to avoid any doubt, your heads of agreement should include a statement somewhere within the document stating that the parties agree and acknowledge that the heads of agreement either is or is not binding on the parties.
Benefits of having one?
Heads of agreement set out the terms and conditions of an agreement prior to a contract being prepared. Having a heads of agreement in place can save time and money in the drafting process of a further contract. A good heads of agreement will address the pressing commercial issues agreed by the parties. When prepared to this standard it is generally safe to say the main aspects of the agreement have been addressed and therefore will not require significant negotiations later down the track. If majority of the terms and conditions have been ironed out in the heads of agreement it will prevent additional work for your lawyer in negotiating and drafting the terms of the formal agreement, which will in turn save you money.
When a heads of agreement is well drafted it will minimise the risk of any crucial terms important to either party being left out.
Additionally, having a heads of agreement in place means that both parties will know the intention of the formal agreement. This means when the formal agreement is being prepared there should be no significant differences in the expectations of the parties and therefore no delays in a formal agreement being finalised and signed.