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Heads of Agreements – Are they Binding?

There is a level of uncertainty surrounding the legal implications of Heads of Agreement documents. Questions which are commonly asked include: Do you forgo your rights by signing a Heads of Agreement? Are they binding? Or are they simply an agreement to enter into further negotiations or to contract at a later stage?

Heads of Agreement are generally considered to be non–binding documents outlining the main issues relevant to a tentative contractual agreement. They are a common feature of modern negotiating practice in complex commercial transactions such as joint ventures.

In some cases, Heads of Agreement are used as a way of maintaining a situation prior to an agreed contract to allow future negotiation of terms. Whilst Heads of Agreement are generally not binding on the parties, in recent years there has been a growing trend by the courts to recognize Heads of Agreement as a binding contract in certain circumstances.

To be enforceable, Heads of Agreement must contain all of the essential terms that are intended to apply in the formal contract. The parties must also intend to be bound by the terms and conditions outlined in the Heads of Agreement. This intention to bind is essential for a Heads of Agreement to be classified as a binding contract. For instance, if the Heads of Agreement contains the words ‘full and binding effect of what is now agreed’, case law suggests that the courts will be more prepared to find that the Heads of Agreement is binding and enforceable.

Whether there has been partial performance of the alleged contract will also be considered in determining the parties’ intentions. Where the parties have commenced to carry out the general terms stated in the Heads of Agreement, the courts will be more willing to hold that there was an intention that the document was to be enforceable when the Heads of Agreement was entered into.

Consequently, where there is an intention by the parties to create binding contractual relations through a Heads of Agreement, case law suggests that courts are increasingly more willing to hold that the document is binding and enforceable. As is the case in most contractual matters, each case will rest on its own facts and you should seek legal advice to determine whether a specific Heads of Agreement is binding.

This is not intended to be legal advice. It is a brief overview of a very complex area of law in which different circumstances will impact on the outcome. Accordingly, please ensure that you seek legal advice that applies to your specific circumstances prior to signing any documents, including a Heads of Agreement.

For further information please contact Berrigan Doube Lawyers.