Issues Associated with Heads of Agreement

A Heads of Agreement (HOA) or Memorandum of Understanding (MOU) is commonly used in business negotiations which have reached a certain point with final documentation pending.

A well prepared HOA provides the parties to a transaction with a framework for negotiating a final contract, evidences commitment for the benefit of third parties including financiers and provides a degree of confidence that a deal is probable before further expense is incurred.

However, there are also risks associated with such documents.  By way of example, it may be erroneous to immediately assume that a HOA is legally binding or, conversely, simply assume that it is not.  The reality is that a HOA could be either binding or not. Generally speaking, parties will intend for the HOA to not bind them in relation to the key terms of a proposed arrangement.  However, they may require matters relating to exclusivity of negotiations, confidentiality and due diligence to be binding to provide them with a degree of certainty in relation to the framework for negotiations.

Case law highlights that caution should be exercised to ensure that the intentions of the parties are accurately reflected by the HOA.  In the case of Baldwin v Icon Energy Limited, the parties did not ultimately agree on the terms of a formal agreement after signing an MOU.  In that case the MOU obliged the parties to use their reasonable endeavours to negotiate a gas supply agreement (GSA).  The MOU provided that no binding obligations were created and that neither party was obliged to enter into any further agreement.  Nevertheless, the Plaintiff sued to enforce the MOU.

The case considered whether the parties were legally obliged to negotiate a GSA.  Not surprisingly, the Court concluded that the terms requiring the parties to use reasonable endeavours to negotiate were unenforceable due to uncertainty.

The takeaway from the above is that while the use of a HOA or MOU can be important in commercial negotiations their benefits are limited if not properly prepared.  To the extent that you are considering entering into a HOA as part of your negotiations it is highly advisable that you engage suitable representation.  Fletcher Law would be well placed to assist in this regard.