4 July, 2024

What are Heads of Terms? …aka Heads of Agreement, Memorandum of Understanding, Term-sheet

In this video, I answer the question, What are Heads of Terms? …or Heads of Agreement, Memorandum of Understanding, or Term-sheet?

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First, and crucially…

I have no qualifications to give legal advice. So, this is not legal advice. It is an explainer video, based on general business and commercial experience.

Heads of Terms

Heads of Terms are also called Heads of Agreement, a memorandum of understanding, a term-sheet, or a letter of intent.

But, What are Heads of Terms?

Heads of terms are a written outline of the agreement the parties intend to commit to. That is, an ‘agreement in principle’.

They set out the key commercial principles and intentions which the parties have discussed during negotiations. They intend the Heads of Terms will form the basis of a future, more detailed contract.

Once Heads of Terms have been agreed, the parties will have the confidence to commit to the costs of negotiating the details and having their legal teams draft the full contract.

Are Heads of Terms Legally Binding?

Heads of Terms are not usually intended to be legally binding, but to be the basis of a strong commercial commitment. However, there are circumstances in which Heads of Terms can become legally binding, so it is always wise to take advice from a lawyer with expertise in the appropriate legal jurisdiction. I am not one!

So you can get an agreement in principle to the broad outline, subject to the formal contract.

When We Use Heads of Terms

Heads of Terms agreements are most often used when the proposed transaction is complex. Developing a Heads of Terms document can help both parties to see if a potential contract looks viable before committing more time and resources towards it if not.

As a result, Heads of Terms are not always signed. But they may choose to sign the document to acknowledge agreement to it. There will therefore probably be a form of words that limits the degree of commitment and enforceability – for example, a term like ’subject to contract’. So, the parties should always take legal advice before signing a heads of terms agreement. This can be a complex area of law, that may be different in each jurisdiction.

What do Heads of Terms usually cover?

Heads of Terms usually include:

  • The identities of the parties
  • The fundamental purpose of the contract
  • The obligations on each party
  • The commercial terms, including price and payment schedules
  • The terms of the contract
  • Important dates
  • Confidentiality agreements
  • Any protection for the parties in the event of a failed transaction
  • Any unusual provisions which are key to whether a party would proceed with the transaction or not
  • Key issues that remain to be discussed or agreed on

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Negotiation Skills from our sister channel, Management Courses

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Mike Clayton

About the Author...

Dr Mike Clayton is one of the most successful and in-demand project management trainers in the UK. He is author of 14 best-selling books, including four about project management. He is also a prolific blogger and contributor to ProjectManager.com and Project, the journal of the Association for Project Management. Between 1990 and 2002, Mike was a successful project manager, leading large project teams and delivering complex projects. In 2016, Mike launched OnlinePMCourses.
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