News & Views

Heads of terms are key to successful commercial negotiations

When entering into a commercial agreement, whether as an individual or as a business, it is important to have a mutual understanding with the other party of the ‘contractual non-negotiables’ and the key commercial details that will form the basis of the proposed contract. Such details can be set out in a document commonly known as ‘heads of terms’ (or ‘HoTs’). This should lay the foundations for a smooth and successful contractual relationship going forward.

What are the benefits of heads of terms in commercial transactions?

Whilst HoTs are commonly used in the context of corporate transactions such as mergers and acquisitions, HoTs are equally beneficial to agree in the early stages of a commercial project for the following reasons:

• HoT’s set the stage for clarity and mutual understanding from the outset and can outline a timetable and obligations of the parties during the negotiation.
• Any issues can be identified and resolved early on which will save on time and costs in the long run as the contract drafting process will be streamlined.
• The parties will demonstrate commitment and good faith and demonstrates a genuine commitment to the deal.
• HoT’s can provide a framework for the parties to introduce binding commitments at an early stage, such as provisions around price, exclusivity undertakings, confidentiality and service-level expectations.
• Any pre-conditions to signing the contract can be set out, such as obtaining clearance by relevant regulatory bodies, and who is responsible for the submission of any regulatory applications. 

How binding are commercial heads of terms?

HoT’s evidence serious intent and have moral force, but do not legally compel the parties to conclude the deal on those terms or even at all. Therefore, by default, most heads of terms are considered ‘subject to contract’. Nevertheless, there are typically two types of HoT’s which are entered into by parties:

• Non-binding - such HoTs would expressly state that it is not intended to be legally binding on the parties and would act to confirm moral commitment on both sides to observe the agreed terms as opposed to a legal commitment. It does not replace the need for a contract, nor does it gain contractual force simply by stating the parties failed to enter into a legally binding agreement at a later date.
• Partially-binding - these types of HoTs would contain clauses which are not intended to be legally binding, such as those relating to the commercial terms of the deal. However, certain legally binding provisions can be incorporated in HoT’s such as those relating to confidentiality and exclusivity, governing law and jurisdiction, protecting sensitive information and preventing parties from engaging with other potential partners during the negotiation period. This provides a level of security and certainty, particularly in competitive market.

Getting the wording right

Appropriately drafted HoT’s should include the key cornerstones of the proposed deal including the parties involved, subject matter, the key commercial terms, the intended duration of the agreement, confidential and exclusivity periods and who will bear what costs. They should also provide a clear outline of the next steps in the negotiation process.

Where there is a mix of binding and non-binding terms, careful drafting will be required to make sure that terms which are intended to be non-binding remain so, and vice versa. It is important to involve your legal advisers early on to help you structure, negotiate and finalise HoTs, and to ensure that all key issues have been considered. Any upfront cost involved in doing this will be rewarded by a more streamlined deal process with fewer stumbling blocks in the future.

For further information, please contact Megan Crone or Philip Bowers or call 0151 906 1000.