Heads of Terms

Heads of Terms

Following initial commercial discussions, you may want to put the key terms down on paper to make sure that the parties are on the same page, before you embark on a time consuming and/or costly negotiation of the full contract.  This type of preliminary pre-contract contract is usually referred to as the Heads of Terms (or just “Heads”), but has a number of alternative names such as Letter of Intent (LOI) or Memorandum of Understanding (MOU).

Issues to consider include:

  • Are any of the provisions in the Heads of Terms are intended to be legally binding, eg confidentiality or non-solicitation? Is this clear from the document? Equally, is it clear that the other provisions are not intended to be legally binding?
  • Will the supplier be starting work after the Heads of Terms have been signed, but before the full contract is concluded? If so, what happens if the parties fail to agree a full contract, but the supplier has carried out work and/or incurred expenditure?
  • Are the parties free to negotiate with third parties once the Heads of Terms have been signed?   If so, how long does the restriction continue?   What happens if a party does start talking to someone else?
  • If a party decides to withdraw without good reason after the Heads of Terms have been signed, are they responsible for some or all of the other party’s wasted legal/other costs? If so, how much? And what constitutes a good reason?

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