In our last blog in this series, we highlighted the key elements of a Heads of Terms including the provisions covered and whether it is legally binding. In this article, we will review the advantages and disadvantages of using Heads of Terms.
Some of the advantages of using Heads of Terms are:
Recording of milestones
Getting to the point of an agreed Heads of Terms can be a major milestone on what might or might not have been a long road of negotiation and discussions between the parties, and can be useful to effectively move onto the next phase.
Binding commitments
If the Heads of Terms are partially binding, parties can introduce binding commitments at an early stage in the transaction e.g. provisions relating to confidentiality (if there is no separate confidentiality agreement), exclusivity or lock-out undertakings and the treatment of costs.
Setting out of key commercial terms
A Heads of Terms can be useful for setting out parties’ understanding, particularly on complex issues such as pricing models and can help focus the negotiations and highlight major issues at an early stage.
Some of the disadvantages of a Heads of Terms are:
Unintentionally binding
If not properly drafted what one party might have considered to be non-binding may end up being used against them as a binding term. If the parties do not want the Heads of Terms to be binding, this should be expressly stated.
Time and resources
The time taken to negotiate Heads of Terms can be disproportionate to the benefit. If the parties intend to sign a full contract in due course, consider whether the parties have sufficient time and resources to negotiate the Heads of Terms and if so, whether they are prepared to dedicate those resources to work on the Heads of Terms.
Expiry of Heads of Terms and contractual vacuum
If Heads of Terms are binding, there should be clear provisions about what happens when they expire. Failure to agree this will leave a contractual vacuum and cause uncertainty over whether there is a contract in place and, if so, on what terms.
Conclusion
Where parties prepare Heads of Terms in an inappropriate manner, and without legal advice, the document prepared has the potential to cause more harm than good. Any ambiguity can cause uncertainty over the exact nature of the relationship between the parties. There can be doubts over whether or not the parties had intended to be legally bound by the whole document or by particular terms within the document. Most uncertainties can be eliminated or at least reduced by clear drafting.
If you would like more information on this topic or any other of the topics in our series on Mergers and Acquisitions, contact:
