Heads Of Agreement

Updated on May 15, 2024
Article byPriya Choubey
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Heads Of Agreement Meaning

Heads of Agreement (HOA) refers to an initial document that is not legally binding over the parties to a transaction, partnership, property sale, joint venture, or any other agreement. Hence, the parties go through it to know about the main clauses of the contract before signing the final agreement, being not liable to fulfill the obligations defined under the HOA.

Heads Of Agreement

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This tentative document, also known as Heads of Terms or Letters of Intent, is drawn up at the primary stage, where the parties are still in the negotiation phase before entering into the final contract. However, it may contain specific legally binding terms like a confidentiality clause. It briefly defines the clauses or terms of an agreement, providing an overview but not an in-depth explanation of both parties’ expectations and potential obligations.

Key Takeaways

  • The Heads of Agreement is a primary document prepared to outline the framework of a potential formal contract between the parties entering into a partnership, transaction, or any other business deal. It is generally non-enforceable by law and negotiable among the parties.
  • It comprises the scope, obligations, responsibilities, timelines, specific conditions, financial arrangements, and other relevant terms of an agreement.
  • Such a document differs from the memorandum of understanding, a non-binding negotiable agreement, but can cover or may be extended to cover international deals, relations, businesses, partnerships, and research collaborations.

Heads Of Agreement Explained 

Heads of Agreement is a preliminary document that chalks out the fundamental terms and obligations of a potential contract or transaction between parties. This step occurs before a formal contract is drafted. It addresses essential aspects like the agreement’s scope, each party’s responsibilities, financial arrangements, timelines, and other specific requirements. Moreover, this document serves as a ground for discussions during the negotiation phase before a formal and binding contract is agreed upon and finalized. It can be presented as proof of the upcoming deal between the parties and creditors, investors, and affiliates.

The key features of a heads of agreement are its tentative nature and precise format, allowing the parties to define their roles and responsibilities in a contract succinctly. However, unlike the actual contract, nothing is discussed in detail here. If all the parties agree to the terms, they can sign this letter of intent. As the parties enter into the heads of terms or heads of agreement contract, accountants and lawyers draft a comprehensive document or contract. Parties to the contract can discuss and work out unfavorable terms of the agreement. Parties can even withdraw from the contract at any time before signing the final contract.

Although such documents are not legally binding, i.e., make the parties legally liable or answerable, there are specific clauses in most of these letters of intent that either party cannot renege on or revoke. It may include non-disclosure, intellectual property, exclusivity conditions, etc. Failure to abide by these terms by any party results in the filing of litigation by the other, demanding compensation, relief, specific performance, or embargo.

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Examples 

Heads of Agreement contracts lay a foundation of the potential terms and conditions of a proposed agreement or deal between parties. Here are some common examples of it:

Example #1

Suppose ABC Enterprises and XYZ Ltd. are planning to enter into a property purchase deal. Per the agreement, the former is to buy the commercial building from the latter. They initially prepare and sign heads of agreement contract, which outlines the parties involved, property description and location, purchase price or valuation method, deposit amount, due diligence period, closing date, etc. 

However, ABC Enterprises decides not to go ahead with the purchase later. It informs the seller per the terms defined in the Heads of Agreement contract. Hence, ABC Ltd is not held liable for canceling the deal.

Example #2 – Heads Of Agreement Signed Between PureCycle And Mitsui

PureCycle and Mitsui agreed and signed a Heads of Agreement on March 17, 2023. The companies joined forces to combat plastic waste and foster a circular economy in Japan. Their objective was to transform plastic waste into recycled polypropylene resin, which would be utilized in various products, including consumer goods, food containers, and automotive interiors.

This initiative aligns with sustainability objectives, and PureCycle aims to expand its global presence with upcoming recycling facilities in Europe and South Korea. 

Template 

A Heads of Agreement sample has been given below:

HEADS OF AGREEMENT

THIS HEADS OF AGREEMENT (the “Document”) made as of this ________ day of

________________, ________ (the “Execution”),

BETWEEN:

____________________ of ________________________(the “Party”)

BACKGROUND:

A. ___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

This document serves as an initial framework for future agreements between the involved parties. The terms outlined herein are not exhaustive, and it is anticipated that additional terms may be introduced while existing ones may be modified or removed. The fundamental or key terms are outlined as follows:

Non-Binding

1. This document is intended for informational purposes only and does not establish a legally binding agreement between the parties involved. Only a future agreement, formally executed by the parties, will be legally enforceable. Any terms and conditions outlined in any future agreement will take precedence over any provisions in this document. The parties are free to engage in negotiations with other third parties concerning the subject matter outlined in this document.

Transaction Description

2. The subject of this transaction is described as follows:

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

Closing Date

3. The transaction will be completed on or by the _________ (the “Closing Date”). All obligations, as indicated in any future agreement, will be completed and met by the Closing Date.

Representations

4. The merging party affirms and guarantees that their respective assets, whether real or personal property, comprising any or all of this proposed transaction, are devoid of any liens, charges, encumbrances, or rights held by third parties. In the event that the representations made by one or more of the parties are found to be false on the Closing Date, any remaining parties retain the right to terminate any forthcoming agreements without incurring any penalties, and all deposited funds shall be refunded.

This Document accurately reflects the understanding between the Parties, signed on this ________ day of ________________, ________.

___________________________

____________________ (Party)

Pros And Cons

The Heads of Agreement offer various advantages and disadvantages to the parties preparing to enter into a contract. Some of these are stated below:

ProsCons
Clear Communication: A letter of intent outlines a deal’s primary terms, establishing a shared understanding between the parties involved before proceeding to the next step.

Exhibits Commitment: Such a document shows the commitment of the parties to working out a final agreement, fostering a sense of trust and dedication between them.

Flexible, Tentative, and Negotiable: It offers a preliminary framework that allows parties to collaboratively refine and negotiate terms before formalizing them into a binding contract.

Generally Non-binding: A heads of terms is often a rough draft exhibiting the potential roles and responsibilities of the parties. Signing such a document does not make either party legally obliged to fulfill the conditions outlined in the agreement.

Potential Legal Implications: These agreements offer specific legal protection if carefully drafted. In some cases, they could enable parties to seek legal recourse or remedies in case of non-compliance with particular clauses.

Precise Format: While a letter of intent is a blueprint of a potential deal, it does not include all the details. Thus, it is easy to draft and rework such a document.
Results in Disputes: A Heads of Agreement document lacks legal enforcement, i.e., it cannot be enforced legally unless explicitly stated. Hence, it introduces uncertainty and disputes if the parties fail to agree or are not on the same page about the deal.

Limited Scope: Since these documents primarily focus on key terms, they do not consider all the intricate details, potentially resulting in misinterpretations or omissions.

Uncertainty: If parties disagree on specific terms during the negotiation phase, the entire agreement might be jeopardized, leading to the deal’s termination.

Potential for Exploitation: The non-binding nature of these agreements could allow one party to withdraw or pursue alternative options if a more favorable deal arises.

Heads Of Agreement vs Memorandum Of Understanding 

Both Heads of Agreement and Memorandum of Understanding (MOU) are negotiable documents that outline terms and conditions for potential agreements or collaborations between parties. However, there are certain differences between these documents. These have been explained in the table below:

BasisHeads Of AgreementMemorandum Of Understanding
DefinitionIt is a preliminary, non-binding document that outlines the key terms and fundamental obligations of the parties involved in a potential deal.A MOU is a primary document that exemplifies the parties’ intentions towards a deal. It thus institutes a framework for future agreements.
PurposeIt offers a foundation for negotiating finer agreement details.It aims to express mutual understanding or agreement between entities, governments, or individuals to collaborate and cooperate for specific reasons and their commitment to progressing toward a formal agreement.
ScopeIt is limited to business dealings.The MOU has a broader scope than HOA; it extends to international dealings.
UseThey are commonly employed in commercial transactions, particularly business acquisitions or joint ventures.They are widely used across various contexts, including international relations, business, partnerships, and research collaborations.
Key FocusIt focuses on a basic framework and needs comprehensive legal and technical specifications and insights.MOUs establish high-level objectives and goals and define the areas of cooperation.
EnforceabilityDepending on the type of deal and parties’ intent, it may or may not carry legal obligations. However, such enforceability is limited to specific clauses of the document.Generally, it lacks legal binding and depicts the parties’ common understanding and intentions.

Frequently Asked Questions (FAQs)

1. What specific objectives of a party to the contract does heads of agreement cover?

Some of the primary objectives of the parties entering into heads of terms include:
● Initiating a deal;
● Establishing a common ground for negotiation;
● Waiving any uncertainty about pre-contractual risks, such as the ones related to non-disclosure, exclusivity, or intellectual property;
● Chalking up a framework bearing all the relevant clauses;
● Offering the assurance of an upcoming deal or contract to the opposite party;
● Communicating intent and showing evidence to assure creditors and investors of a potential contract.

2. What is the head of terms for a purchase agreement?

It is a document prepared to initiate an acquisition deal, exhibiting the parties’ good faith intentions. It comprises a clause where the buyer makes a certain deposit to show their intent to purchase.

3. What is the difference between a head of terms and a contract?

Heads of agreement are drafted at the initial stage of entering into a formal contract, and it outlines the elementary terms and conditions of a prospective deal. It functions as a “subject to contract”, which is not legally enforceable but provides a base for negotiation between the parties. A contract is the final phase of a deal, which states mutually agreed-upon terms and conditions, making the parties legally responsible for fulfilling their obligations as stated in the document.

This has been a guide to Heads of Agreement and its meaning. Here, we explain it with its template, examples, comparison with MOU, and pros & cons. You can learn more about it from the following articles –

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