What's a Heads of terms (commercial activities), and when do you need it?
Use this template when you’re in the early stages of discussing a potential collaboration or commercial transaction and there is no final form contract recording the exact detail of your relationship in place. It is appropriate to commercial discussions between UK-based businesses. If you are looking to create Heads of Terms with a non-UK-based entity, please use our Speak to a Lawyer service and our experts can advise you on your specific options relevant to the jurisdictions that you have in mind.
Heads of Terms come with many different labels, including ‘MOU’s’ (memoranda of understanding) or ‘letters of intent’ and they have no special legal status, like most other business documents that you might sign. They are usually intended to record in outline what parties currently intend to do - and are probably still exploring - recognising that the parties are not yet in a position to pin down a final, fully binding contract. They can be a helpful negotiating tool, flushing out key elements that would need to be considered and agreed on, for the deal/relationship to go ahead.
Often, Heads of Terms are not legally binding at all and, depending on their structure, they may be viewed more as an expression of good faith than as a document by which the parties intend to be legally bound. But having an entirely non-legally-binding document is not ideal, as even at this stage of your discussions, you may need a level of protection that is not available, for example, by simply relying on a confidentiality agreement (or NDA).
So, you’ll see that some of the provisions with these Heads of Terms are expressly stated to be legally binding and where there is no statement, the intention is that they will not be. The terms that are not legally binding often cover the areas of detail that you are still working out, but will need to refine and agree, so that you can get to a full-on legal contract stage. Where they are intended to be legally binding and to protect you is in relation to key commercial risks that can arise at the start of any commercial discussion, such as the protection of your IP, remedies if your counterparty suddenly attempts to poach your staff, or customers, whether or not you want a period of exclusivity to protect your discussions from any competition – and that’s whether or not you ultimately conclude a legally binding contract with that counterparty.
Different types of heads of terms will apply to different scenarios. These ones are flexibly designed to cover most commercial/trading activities. If, for example, you’re looking to buy or sell a company or other business assets, or you have a different purpose in mind, you may need a different template. If you’re in any doubt, please let us know and we will help you to identify the right solution for your particular objectives.
One of the most important things to ensure here is that this document does in fact accurately record BOTH parties’ intentions, so that you don’t end up in a position where your counterparty signs it, but acts differently in person, or doesn’t consider it worth much and simply ignores it. If you believe there’s a danger of that, you might be better simply to move straight to a formal legal document, with a confidentiality agreement supporting the early stage discussions.