In the midst of Covid-19, business owners have been concentrating on trying to appropriately manage risks and achieve some sort of certainty in relation to their commercial arrangements.  

Dan Dowen, Commercial Contracts Associate Solicitor at Berry Smith, has been advising clients on how to put in place commercial and contractual measures to protect themselves against the risks associated with Covid-19 and considers below, the benefits of using Heads of Terms.

What are Heads of Terms?

Heads of Terms, Offer Letters, Memorandum of Intention, Letter of Intent – they all refer to the same thing, which is essentially a legally non-binding preliminary agreement that  is used at the outset of a commercial transaction to provide an overview of the parties’ intentions and set out the key commercial issues of an agreement. These terms will often form the groundwork for what will be reflected in the legally binding contract that is to follow.

Whilst Heads of Terms are usually legally non-binding, the document may be drafted in such a way that certain terms or clauses are made legally binding, if it is explicitly stated in the document that such terms are legally binding. Therefore, it is vital that these documents are not reviewed lightly.

What terms are included?

The usual terms often include but are not limited to the following:

Payment

Parties can set out the price to be paid, time of payment, in what form the payment is to be made and/or the applicable pricing structure.

Timetable for completion

It is often helpful for the parties to set a target date for completion and work towards this.

Commercial terms

It is wise to include any commercial terms that have been agreed such as the nature of the transaction, what due diligence will be carried out, if any licences will be granted etc.

Pre-conditions

There may be certain conditions that the parties will want to see fulfilled before entering into a legally binding agreement such as ensuring all clearances, permissions and certificates are obtained.

Exclusivity

You can ensure, via this term, that the other party to the agreement (counterparty) agrees not to negotiate with any third party in relation to the same agreement or deal. This is usually a key reason why parties use Heads of Terms as a business will want to ensure that it does not waste any time and money in evaluating an agreement which could go to another bidder.

Duties of the parties

You may wish to set out what is to be done by each party so that they are clear on their obligations under the agreement.

Confidentiality

This an important term if you and your counterparty have not already entered into a confidentiality agreement. You will want to set out the scope of your confidential information and make it clear that this information should not be disclosed to third parties without your consent.

What are the benefits?

Heads of Terms provide certainty from the get-go and can be a less formal method of consolidating an understanding between you and your counterparty. It provides the opportunity to raise and iron out difficult points early in the commercial transaction, thereby potentially avoiding any misunderstandings later down the line.

Agreeing Heads of Terms can also speed up negotiations and make the process of drafting the final binding agreement a lot simpler.

For many businesses, Covid-19 has caused a significant disruption in their supply chains and commercial arrangements. Businesses are therefore becoming increasingly cautious before entering into commercial agreements, making sure that they undertake plenty of due diligence beforehand. Heads of Terms can often form part of this due diligence process – ensuring that the key points of a potential commercial relationship are agreed from the beginning.

However, it is important to get the drafting of Heads of Terms right, as you want to avoid drafting an unnecessarily long and restrictive document that may dissuade your counterparty from entering into an agreement.

It is essential to seek appropriate legal advice on whether to use Heads of Terms, when to use them and what terms to include in such a document.

We, at Berry Smith, have extensive experience in advising clients on their commercial arrangements and specialise in drafting commercial documents.

If you would like further information on this, please contact Dan Dowen at ddowen@berrysmith.com or alternatively call 02920 345 511 and ask for the Commercial Team.