Heads of Terms for Commercial Transactions

Heads of terms are typically a short document outlining the main terms of a commercial transaction agreed between the parties in principle. Other commonly used phrases for heads of terms are; letters of intent, memoranda of understanding or heads of agreement.

Heads of terms can appear in a variety of ways; they can vary from a simple letter to a carefully drafted and complex document. Commonly entered into at the beginning of a transaction, once the parties have agreed preliminary terms and before the definitive agreements are drafted, heads of terms are often used in larger commercial transactions, where negotiations on the minutiae are considered vitally important parts of the contract.

Do we need Heads of Terms?

The easy answer is; it depends. Here are some positives and draw backs in using heads of terms that may help you consider whether they are required for your particular business and its proposed contract with another:

Heads of terms are favourable if…

  • a transaction is particularly complex. In these instances, heads of terms can help ensure negotiations are focused on the key issues to be decided. It will also prevent the parties wasting time and money in the long run if those issues cannot be resolved after protracted negotiations.
  • you want the other side to observe a commitment to the terms that have already been agreed informally. Each party can proceed with more confidence if previously agreed terms are recorded and representatives from both parties have signed the document.
  • you wish to introduce binding provisions, such as confidentiality obligations, exclusivity provisions and the agreement to pay legal costs if the other party leaves the negotiations without entering a formal agreement.
Heads of terms are not favourable if…
  • you wish to have legal certainty. Typically, heads of terms are not legally binding (although they carry a strong moral obligation). That said, certain provisions in heads of terms can be made legally binding (such as providing for a obligation of confidentiality) or locking out all other persons from negotiating a similar contract with the other party.
  • you are entering into a fairly basic agreement or an agreement for repeat business. The time taken to agree terms may be disproportionate to the benefit in this instance.

These points are by no means exhaustive and particular care may need to be given to arrangements that could effect competition or where trading internationally. Our Commercial team can ensure that heads of terms are worthwhile for your proposed transaction and will always advise on key considerations that you may or may not have already thought of.

Our expertise with Heads of Terms:

Here are a small selection of the types of clients we have acted for and the work we have done in this area:
• We have prepared and assisted with the negotiation of heads of terms for numerous projects for an educational publisher.

Initial Discussion

Should you have any queries regarding heads of terms, please get in contact with Robert Capper, head of the Commercial Department, for an initial and no obligation discussion either by phone on +44 (0) 1905 744814 / +44 (0) 7909 970323 or by e-mail at rcapper@hcrlaw.com.