The term ‘Heads of Agreement’ might conjure up some interesting images with some people thinking of a scene from a Coppola or Scorsese movie with the heads of two mafia families sitting down to agree on a deal. In truth, the reality is a lot less dramatic and no doubt some will be disappointed to discover that a Heads of Agreement (HOA) is simply a legal document, however, it can certainly be an important legal document in commercial law.
An HOA is somewhat of a halfway house agreement, so it can have far more legal significance than a simple shake of hands or a verbal agreement between two parties. However, it does not have the same level of legal weight as a formal contract. As such it may set out some of the preliminary agreements that have been reached and some of the key terms and conditions but falls short of being the formal contract.
When A Heads Of Agreement Should Be Used
Heads of Agreements can be used in several scenarios relating to commercial, civil, or family law. Its main use in commercial law is when two parties are working towards setting up a commercial partnership. It primarily sets out the expectations and the goals that both parties have for the partnership.
An example where a Heads of Agreements might sit across both commercial law and family law is a situation where the owner of a business is going through a divorce and any company they own, or shares of company ownership is part of their personal assets. Here an HOA might be used as part of the process to sell the business or their shares before a financial agreement being reached with their ex-spouse.
Conditions Required For An HOA To Be Considered Legally Binding
As a Heads of Agreement is not a final contract, there is often some confusion as to whether it constitutes a legally binding contract that the two parties are obliged to honour and uphold. An HOA can be legally binding, but for that to be the case, some factors must be considered.
#1: The terms and conditions included in the HOA must be expressed in such a manner that there is sufficient expectation that they would be enforceable in a court of law. In other words, the HOA must be clear, unambiguous, and written in language that leaves no room for doubt as to its legal validity.
#2: The HOA must cover all of the terms and conditions that relate to the overall agreement or contract that the two parties are entering into. This needs to cover specifics such as fees and prices if applicable. Note that minor terms where it is anticipated there may not be an agreement do not need to be agreed upon for the HOA to be valid. This could include the new company name, for example.
If the HIOA is vague, unclear, induces uncertainty and does not cover the entirety of the core terms that the parties are agreeing to, then it is almost certain to be considered void if it were ever to be judged upon in a court.
Other Legal Considerations
Other legal considerations must also be made when an HOA’s legality is being considered. The legal considerations which also apply to an HOA and its legal enforceability include:
- Complexity and importance of the transaction
- The amount of detail the HOA includes
- The level of formal and informal language used
- Previous dealings between the two partiers
- The conduct of the two parties during previous dealings
- If the HOA forms parts of a series of legal agreements between the two parties
It is strongly recommended that you seek the help of a commercial lawyer if an HOA is being proposed or drafted.