Don’t get in a bind…
In many commercial transactions the parties agree some form of Heads of Terms (or Letter of Intent) as a first step, setting out key principals agreed between the parties.
This process should not be taken lightly. Clear drafting is important so that the Heads do not become legally binding. That said, there may be some terms in the Heads which are intended to be binding such as confidentiality provisions or perhaps a period of exclusivity locking out other potential interested parties for a period of time thereby allowing the legal documentation to be finalised.
The key advantage of having well drafted Heads of Terms is that it gives a steer as to the broad terms agreed such as price and time scales. The Heads also have the advantage of creating a moral obligation between the parties as it is more difficult later down the line for a party to go back on principles agreed in the Heads. That said, the moral force of the Heads could work the other way in that it may limit the ability – or make the situation more tense – if, as part of agreeing contract terms, a party then wants to renegotiate a term agreed in the Heads. Again, careful, considered drafting of the Heads is needed to get the balance right.
Some useful tips in drafting Heads:
- set out any pre-conditions that must be met before a contract can be signed
- include a statement that the Heads are not exhaustive so the parties do not get involved in too much detail
- if there is concern about agreeing Heads without having all information needed at that stage, then a statement to that effect in the Heads would be a good idea
- do not fall into the trap of over negotiating the Heads so that it strays into the detail which will form part of the legal documentation
- if some of the terms in the Heads are intended to be legally binding they must be stated as such and the document should also clearly state which provisions are not intended to be legal binding
- sometimes parties use the expression “subject to contract” which might be helpful but it is not bullet proof in terms of preventing the Heads from potentially morphing into a legally binding contract so do not rely on simply stating that the Heads are subject to contract
- • care must be taken that statements in the Heads do not create an unintended liability for example, for fraudulent statement or misrepresentation.
If not drafted properly then Heads of Terms can pose a risk. Uncertainty and ambiguity will at best cause tension between the parties later in the process or at worst, morph into an unintended binding contract or, conversely, might mean that any terms intended to be legally binding fail to work, or careless drafting could even expose a party to claim for misrepresentation.
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If you would like to have a no obligation chat as to how to protect both your business and your family then I am always happy to talk, without obligation:
Tel: 01225 287516 or e mail: jane.latham@lcls.co.uk