Take care when discussing heads of terms

If informal discussions on a new business arrangement are looking promising, then a key step may be the preparation of a document to outline the ‘heads of terms’. This document records, in a series of relatively brief bullet points, the key commercial terms that have been agreed between two (or more) businesses relating to a newly proposed deal or transaction.

The heads of terms document can be passed to your commercial solicitor to form the basis of a comprehensive long-form legal contract ready for signing. But should you get your solicitor involved before the heads of terms have been agreed?

Agreeing heads of terms is particularly useful for complex or bespoke business contracts. While it may be tempting to do so without speaking to your lawyer, this can be a risky approach. It can sometimes be tricky to reverse or go against something that has already been agreed at the outset and put in writing in the heads of terms. Discussing things with your solicitor behind the scenes, can help you avoid such pitfalls in the future.

In this blog, we highlight some of the key considerations when agreeing heads of terms.

What should your heads of terms include?

You can think of the heads of terms document as a kind of aide memoire to set out the key commercial terms that have been thrashed out and agreed during pre-contract meetings and discussions. The document helps ensure that those points of agreement are committed to paper so they are not forgotten or overlooked, and so that neither business can later row back on something that was already agreed in principle.

Therefore, the heads of terms document should record the fundamental business and monetary terms. It is not concerned with legal jargon or routine, standard contract clauses. That is for the lawyers to agree further down the line. In other words, the heads of terms should reflect the key commercial pillars that will hold the whole deal together (price, goods or services, and timescales etc). On the other hand, the long-form contract that the lawyers draft contains all the detailed legal clauses that create certainty and specificity to the contract to make this particular deal work and help prevent a dispute.

The following elements are commonly found in a set of heads of terms:

• description of the transaction;
• description of the goods or services being bought and sold;
• length of contract term and timing of any break clause;
• termination rights;
• pricing structure;
• exclusivity;
• territory; and
• restrictions, such as a list of reserved or protected clients.

The following elements are commonly excluded, as they are considered ‘legal’ terms within the lawyers’ domain;

• limitation of liability;
• indemnities;
• warranties;
• routine, standard legal clauses; and
• notice requirements.

Timescales and deadlines

It can be tempting to put timescales and deadlines in the heads of terms related to the progress of the contract or transaction at hand. However, depending on the intent and the language used, this can create binding contractual arrangements which may or may not be intended.

Are heads of terms legally binding?

A heads of terms document is not usually considered to be legally binding, however there can be exceptions to this depending on the intent and language employed.

If you do not wish this document to be legally binding, then it is wise to state this upfront by including a bullet-point to that effect and by marking the document as being ‘subject to contract’.

There is no consistent norm about whether heads of terms are signed or left unsigned. However, the addition of the phrase ‘subject to contract’ should generally help make clear that the document is subject to the contract that follows even where it has been signed.

When should you get your lawyer involved?

There are differing views on when you should engage your lawyers. Sometimes it may be beneficial for the businesses to simply thrash out the commercial terms themselves and then issue them to the lawyers to draft the contract. This may save some time and money, but there is the risk that drafting by a non-lawyer may result in a lack of clarity on fundamental issues. Therefore, for any deal that has a level of complexity, it is generally advisable to consult with your lawyers first.

You would be well advised to involve your lawyer in the contract, so that they can review any draft heads of terms for you and advise accordingly. We have a team of expert commercial lawyers who are experienced at spotting potential issues at an early stage, so that you do not commit yourself to anything which is contrary to your interests.

Furthermore, by consulting lawyers at the outset, you can add a level of credibility to your proposition and reduce the risk that a larger business might seek to exploit any perceived naivety or inexperience.

How we can help

If you are in the early stages of discussing an important deal, our commercial lawyers can assist you in drafting your heads of terms, or providing background legal advice on key issues that will help to shape the document.

If your negotiations are more advanced and you already have a draft or agreed set of heads of terms, we can take a look and advise on them and negotiate any finer points of detail with the other lawyers.

We can then proceed to prepare and advise you on the main contract, and ensure that your interests are well looked after by expert hands.

For a conversation on any contractual matter, please contact a legal adviser in our corporate and commercial team on 01653 600070.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.