Heads of Agreement

A heads of agreement (also called heads of terms or a letter of intent) is an initial document that outlines the basic framework of a proposed transaction or partnership. It is used during the pre-contractual stage to set out the main commercial points before detailed negotiations and the drafting of a final legally binding contract. The term is commonly used in jurisdictions such as the UK, Australia, and New Zealand.

Key takeaways

• A heads of agreement sets out the principal terms and intent of parties but is typically non-binding.
• It speeds negotiations, reduces wasted effort, and provides evidence of intent for lenders or investors.
• Specific provisions—such as confidentiality, exclusivity, non-solicitation, and certain IP terms—are often drafted to be binding.
• Clarity about which clauses are binding and reasonable timeframes are essential to avoid disputes.

What it covers

A heads of agreement normally includes:
* Parties involved
* Broad commercial terms (price, structure, key deliverables)
* Timelines and milestones
* Conditions precedent (due diligence, regulatory approvals)
* Confidentiality and exclusivity clauses (often—and deliberately—expressed as binding)
* Any other pre-contractual matters the parties want to record

Because it is intentionally high-level, it does not attempt to cover all detailed contractual mechanics.

Purpose and benefits

Heads of agreement are used to:
* Provide a shared roadmap for negotiations
* Record agreed-upon core terms so parties can focus on remaining issues
* Demonstrate commitment to lenders, investors, or other stakeholders
* Set ground rules for confidential handling of information and exclusivity during negotiations
* Identify and schedule conditions that must be satisfied before a final contract

Binding or non-binding?

Whether a heads of agreement is legally binding depends on its wording and the parties’ intent:
* Many heads are explicitly non-binding except for a few specified clauses (e.g., confidentiality, exclusivity, non-solicitation, limited IP protections).
* If the document is drafted to be binding in whole or in part, those binding provisions can be enforced—subject to usual contract-law remedies (injunctions, equitable relief, damages, or specific performance).
* Ambiguous drafting can create unintended obligations or litigation risk, so precision is crucial.

Typical process

1. Parties negotiate and agree core commercial terms.
2. Heads of agreement is signed to record those terms.
3. Legal and financial advisors conduct due diligence and draft detailed, binding contracts.
4. Conditions precedent are satisfied and the final agreement is executed.
5. Either party may terminate negotiations at the pre-contractual stage unless binding clauses prevent this.

Practical tips

• Clearly state which clauses are intended to be binding and which are not.
• Keep binding timeframes reasonable and specific.
• Involve lawyers early to avoid ambiguous wording.
• Use the heads to streamline due diligence and signal seriousness to third parties.
• Be cautious about making the entire document binding unless you intend immediate enforceability.

Conclusion

A heads of agreement is a useful tool to crystallize key terms and guide negotiations toward a final contract. Its value lies in clarity and efficiency—but that value depends on careful drafting to ensure parties understand which parts are legally enforceable and which are provisional.