When two parties enter into negotiation for an agreement, such as the sale of a business, the parties should seek to formalize the terms of the discussion prior to signing a legally binding document. If you are interested in signing an agreement with another party, it is important to record the terms that have been agreed upon in order to protect your business assets and resolve future disputes.
What is a Head of Agreement?
A Heads of Agreement is a non-legally binding document that records the proposed terms during the negotiation phase. It is an effective precursor to a legally binding document, expressing exactly what is to be included in a proposed agreement and what is not to be included.
Why Is it used?
While not enforcing both parties to reach an agreement, the document is a gesture of good faith by evidencing both parties commitment to proceed with a binding agreement. The Heads of Agreement ensures that both parties can continue negotiating the final terms of the agreement, make the relevant enquiries before reaching a conclusive decision and exclude third parties from entering into negotiations.
Other key reasons why parties should use a Head of Agreement include:
- It’s a mechanism for resolving disputes to clarify to both parties what is included in the agreement.
- Protects business assets, information and employees from the negotiating party.
- Outlines the parties key roles and responsibilities.
- Formalizes and streamlines the negotiation process.
What is included in a Heads of Agreement?
- Details of the proposed agreement
- The key obligations of both parties
- Target completion date
- Consideration for the proposed agreement
- Options to include legally binding obligations of confidentiality, non-solicitation and/or exclusivity
When are they binding?
Although a Heads of Agreement is non-binding, there have been circumstances where a court has determined that a Heads of Agreement will be enforceable. For the document to be legally binding, the Heads of Agreement must:
- Explicitly state that the parties intended to be bound by the Heads of Agreement
- Signed by both parties and described as a ‘Heads of Agreement’
- Drafted under the supervision of solicitors from both parties
- Inclusive of all essential terms and conditions
- Include a clause stating how unsettled matters will be resolved.
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