What’s the Difference Between a Heads of Agreement and a Memorandum of Understanding?

Heads of Agreement

A Heads of Agreement (HoA) and a Memorandum of Understanding (MoU), can be extremely useful within a commercial setting. However, each document serves a different purpose in the negotiating process. Read on to learn about the differences between the two and how they can be appropriately utilised.

Table of Contents

What is the difference between these documents?

The key difference between an HoA and an MoU is their contents and the intention behind each document. There is widespread confusion as to the distinction between the two. HoA’s and MoU’s are both frequently incorrectly used.

Heads of Agreement

When properly drafted, an HoA is a non-binding document which lays out the terms of a proposed agreement between parties. HoA’s are entered into before a final contract. They are an excellent way to document negotiations by setting out rights and obligations. A contract then formalises this agreement at a later date. A gentleman’s agreement or a commercial lease heads of agreement are alternative names for a HoA. Additionally, HoA’s generally include a termination clause.

Our HoA includes the following:

  • Details of the proposed formal agreement;
  • Obligations of both parties;
  • Consideration for the proposed agreement; and
  • Options to include clauses for confidentiality, intellectual property, non-solicitation and/or exclusivity obligations.

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Memorandum of Understanding

MoU’s act as a record of goodwill between parties. An MoU is a preliminary agreement. The purpose of an MoU is to outline mutual goals and expectations for each involved party. Where parties do not want to imply a legal commitment, they may opt to use an MoU. An MoU will generally outline the intention behind the agreement, the role of each party, a timeframe for the partnership, disclaimers, and any specificities for joint financial transactions. MoU’s also generally do not incorporate a termination clause.

Our MoU covers the following:

  • Limiting the use of information;
  • Prohibition of duplicating memorandum; and
  • Limitation of liability

Are these documents legally binding?

Generally, HoA’s and MoU’s are not legally binding. However, the general principles of contract law still apply. Care should be taken when drafting these documents. You should ensure you pay attention to the:

  • language of the agreement;
  • intention of the parties; and
  • whether the document is certain and complete.

When deciding on the enforceability of an HoA and/or MoU, a court will examine the language of the document in conjunction with surrounding factual circumstances. Stating that the document is not intended to be binding is not always sufficient.

Should I have these documents reviewed by a lawyer?

As both documents are generally not legally binding, a lawyer will generally not be needed. However, to ensure the drafting of the document is correct and that the documents do not become legally binding after the fact, it is advisable to seek the professional opinion of a lawyer. This is the best way to protect your legal interests.

The difference between a Heads of Agreement and a Memorandum of Understanding lies in the content of, and intention behind, each document. To utilise these commercial tools, be sure to check out our document library for documents that can be customised and used in a matter of minutes.

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