Head of agreement document (HoA) is a document that typically includes the key terms of a proposed agreement between two parties. This may come up in commercial law, or business law.
It is is important to note that a head of agreement is a non-binding document. But, there are some instances in which this can be a legally binding document. However, its main purpose is to allow parties to continue negotiations in a more formal environment.
Where are such documents typically used? Largely, heads of agreement is used during commercial transactions, such as when a party is purchasing a business. Before the parties draw up the final commercial contract or formal contract, they use a HoA as a tool for negations.
Through heads of agreement, two parties can confirm their intentions and confirm proposed terms of the binding contract. In this article, we go over some key points in relation to the formal Agreement. We will explore certain risks of entering into an HoA.
Before we dive deeper, here’s a brief list of things that a head of agreement may commonly include. These are:
- The obligations and commitments of both parties to the agreement
- All relevant details of the proposed agreement or partnership
- Target date of completion
- Any options for confidentiality, or exclusivity
- All considerations for the proposed agreement between the parties
When to Use a Head of Agreement?
During the pre-contractual stages (before finalising any contract) two parties have to engage in:
Rigorous Discussions and Negotiations
A head of agreement becomes relevant during this stage. During this stage, parties don’t have to discuss the binding, legal terms or technicalities yet. They can simply negotiate the important terms of the contract in this stage using a HoA, and formalise the contract in later stages. Generally, a head of agreement is extremely useful when two parties want to enter into a contract, but do not have the resources to do so the right way
Collaboration Using a Hoa
For example, let’s suppose that two business heads wish to enter into a partnership. They may not have the time or resources to iron out all the crucial details of the contract/agreement. Each party may have to take care of their individual business affairs before taking this huge step. Therefore, a legally binding contract may not be the best course of action just yet. This will not offer them any kind of flexibility in negotiating important terms.
In this scenario, a HoA becomes very relevant. They can use this agreement to commit to each other, while also being able to manage their individual affairs. They can outline their wishes and intention and cement their partnership before proceeding with the exchange of contracts.
Risks of Entering Into a Head of Agreement
While the intention of a HoA is to make an agreement that is not legally binding, often parties may unintentionally draft one that is legally enforceable. Both parties must also ensure that their company has a registered Australian Business Number (ABN)/Australian Company Number (ACN). Moreover, many parties attempt to draft such agreements by themselves.
Although they are capable to so, handling such matters without lawyers or solicitors essentially means that there is more room for errors. This can include having to face serious consequences if they draft it in a way that they did not intend to.
Moreover, because there’s general uncertainty about the nature of the HoA (whether they are binding or not) many parties may hesitate to enter such an agreement. Now, in the case that two parties enter into it, and one party fails to comply with the terms of the HoA, the other party has no means to seek remedies for this non-compliance.
In other words, if there’s a significant lack of trust between the two parties, they may prefer not to enter into a HoA.
When Is the HoA Legally Enforceable?
There are some instances in which a Court may state that a head of agreement is legally enforceable. This includes if the document:
- Clearly states that the two parties wish to be bound by the agreement legally binding,
- Has been drafted under the supervision of solicitors – where each party has independent legal representation
- Has been signed by both the parties where the legal documents have clearly been described as a ‘Head of Agreement’
- Includes all essential conditions, terms, caveats and the like.
- Includes clauses, drafts and terms that lay out how contentious or unresolved matters are to be resolved by both the parties.
Seeking Advice from Commercial Lawyers
Commercial lawyers are experts when it comes to drafting agreements including non-disclosure agreement and final contract. If you are in the process of undertaking an important business transaction, it is advisable for you to first discuss all steps with a lawyer.
While there are considerable risks or cons of entering into a HoA, there are also great benefits that you cannot ignore. For example, even though it isn’t a contract in itself, it can act as a solid framework for the later steps. This will help the parties save a lot of time.
Only through this agreement can two parties still have the freedom and flexibility to walk away from their deal if things aren’t working out properly. Whereas, it also allows parties to still list out the terms of the deal and their obligations, but in a way that is not binding.
At JB Solicitors, we have an experienced team of commercial lawyers who can provide legal advice and explain binding terms. Our lawyers have years of experience in handling complex matters involving litigation as well.
If you are starting a new business, we also offer subscription-based commercial law services that includes many key services for the pre-contractual stage. For instance, contract drafting, trademark registration for intellectual property and HR matters.
For more information, do not hesitate to contact our team of friendly solicitors today. Get in touch with us today.
