Heads of AgreementA Heads of Agreement is a non-legally binding pre-cursor document that you can use during the negotiation stage to record proposed terms of two parties.
A Heads of Agreement is a good document to start with when you are planning to enter into an agreement with another entity in the near future. It works as an 'agreement to agree', however is not a legally binding contract. It is useful for keeping a record of what was discussed during the negotiation state, and what is to be included in the proposed agreement. If the proposed agreement has a signed paper record, you are able to ensure that the execution of a legally enforceable document is smooth and minimises any potential conflict.
Use this Heads of Agreement if:
You would like to set out the proposed terms of an agreement between you and another party during the negotiation stage before a formal agreement is made.
You would like to set out in writing the intention of the parties moving forward.
What does the Heads of Agreement cover?
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.
Other names for Heads of Agreement include:
Gentlemen's agreement; and
Commercial Lease Heads of Agreement.
What is the difference between a Heads of Agreement and a Memorandum of Understanding?
A Heads of Agreement (HoA), properly drafted, is a non-binding document which sets out the key terms of a proposed agreement between parties. The general intention of a Heads of Agreement is that the document is not legally binding, but in some circumstances it can become legally binding. A memorandum of understanding (MoU) is generally used to document a relationship of goodwill between the parties. A memorandum of understanding is generally not legally binding, unless the agreement satisfies the the elements of a contract.
The difference between the two is that you enter a HoA when you want to document a summary of the key provisions that you and the other party intend to later include in a legally enforceable contract, whereas a MoU, you are not making promises that you or the other party want to be able to legally enforce in a court or through some other legal process.
Is it necessary to use a Heads of Agreement?
A HoA is not necessarily needed when proposing agreements between parties. However, it is a great way to propose an agreement between two parties without having to fully commit to the agreement.
Are the terms of a Heads of Agreement legally binding?
The terms of an HoA are generally not legally binding, however, they have the potential to become a legally binding document. If the HoA satisfies the criteria of a contract, then it does become a legally binding document. If all of the elements required to make a contract are satisfied, a contract will be formed. With this in mind, if the promises made in the HoA are not met, the other party can be legally enforce the document in order to make sure the terms are met.
How do I terminate this agreement?
The best way to terminate an HoA is by including a termination clause into the agreement. This will allow you to be able to part ways with the agreement once a certain criteria is not met or satisfied. An example of this is a termination date. A termination date is the ability to terminate an agreement on a certain date if/ when agreed upon terms are not met. Once the HoA does not satisfy its elements by a certain date the agreement can be terminated.