“Heads of terms” denotes a document signed by two parties intending to enter into a formal contract. Such a document is also commonly referred to as a memorandum of understanding or a letter of intent.
This document is in most regards not legally binding, and merely records future intention of the parties without imposing enforceable obligations on them (with some exceptions, as to which more below).
Heads of terms are frequently used in anticipation of corporate mergers and acquisitions, but they can be used in the early stages of negotiating many kinds of commercial contracts.
The purpose of heads of terms are to set out what the parties expect the basic terms of a contract to be, before negotiating the fine detail. The heads of terms will generally cover the most basic features of the proposed contract, such as the identities of the parties, the fundamental purpose of the contract, and the price. By putting these basic terms into written form at an early stage, the parties have made clear their general intentions, which encourages a positive attitude in the parties and saves the time and cost of protracted discussions on major points, leaving the parties free to concentrate on detailed negotiations.
Heads of terms can also serve a useful purpose in bringing to light irreconcilable differences between the parties, thus saving the wasted time and expense associated with conducting detailed negotiations which ultimately prove fruitless for reasons which might have been revealed at an earlier stage.
A further benefit of the use of heads of terms is that they can contain “lock-out” provisions. These are clauses which are legally binding (unlike the main part of the document) and prevent the parties from negotiating with any other person for a fixed period. Each party can therefore take its time to negotiate the right contractual terms without feeling pressured by a belief that the other party might be conducting negotiations with someone else.
We have extensive experience and expertise in negotiating and drafting heads of terms, memoranda of understanding and letters of intent in anticipation of all kinds of business transactions and commercial contracts. We take a realistic and commercial approach to a client’s needs, always ensuring that we understand the commercial reasons for the proposed transaction.