Is your Heads of Agreement or email exchange binding?

When negotiating a purchase or sale or other transaction, often parties will wish to confirm the terms in writing by email or by signing a Heads of Agreement or Key Terms document.

This can however have unintended results. Often the purpose of the email exchange or Heads of Agreement is simply to record the basic terms of a transaction, with one or both parties then intending to obtain legal advice about whether to proceed or enter into a formal and more complete contract at a later date. Sometimes both parties have different intentions with one party assuming the Heads of Agreement or email exchange is binding, but the other assuming it is not binding unless and until approved by their lawyer and formal contracts are prepared and signed. It can then come as a shock to find that the document or email exchange is already binding.

You should therefore always exercise care when negotiating terms or signing Heads of Agreement and make sure you obtain legal advice.

While sometimes it can be appropriate that the parties are immediately bound by a Heads of Agreement or email exchange, if in doubt or if you cannot get legal advice at the time, the safest course is to include an appropriate statement in the email or Agreement confirming that it is not intended to be binding. Your lawyer can help you draft this. This enables you to then obtain legal advice about the proposed terms. If any terms are inconsistent or if you have failed to consider any key matters, conditions or unintended effects, then further negotiations can take place. If those additional terms can’t be agreed on, then you can choose not to proceed with the transaction.

Author: Cathy Drake