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Before entering into a significant corporate or commercial transaction, it is common for the parties to agree a short, simple summary of the key terms of the deal. This is known as the “heads of terms”, or simply “heads”. It is common for parties to draft and agree the heads of terms between themselves, without the input of legal advisers. However, despite being a simple document, incorrectly drafted heads can still cause problems.
While heads of terms set out the basis of an agreement, they are not intended to be an agreement themselves. A properly drafted set of heads should make clear that they are not legally binding themselves, and the transaction is subject to a formal legal contract being entered into. If this is not made adequately clear, there is a risk that agreeing the heads can give rise to a binding agreement before all of the terms which would form part of a longer contract can be agreed.
Contrary to the general principle that heads of terms should not be legally binding, it is good practice to include some clauses which are legally binding. Typically, these include clauses relating to confidentiality and exclusivity, among others. Negotiation of the heads can be a lengthy process which includes sharing sensitive information. If negotiations ultimately fail to lead to an agreement, it is important that the parties are adequately protected in relation to the information they may have disclosed and the time and cost incurred.
In the absence of legal advice, there is a risk of inadvertently agreeing terms which a well advised party would not. This might include concepts which are legally unenforceable or not permitted, or terms which are otherwise disadvantageous. For example, a party may agree to give a particular warranty, which appears reasonable on its face, but may well be onerous when the full implications are explained.
The corporate team at Ramsdens are experienced in advising in relation to all aspects of heads of terms. Please do not hesitate to contact any of them should you require advice in relation to a proposed set of heads of terms or any other commercial issue.
For more information or to make an enquiry, please contact our team by emailing email@example.com or calling 01484 821 500. Alternatively you can fill out an online enquiry form and a member of our team will be in touch.