Heads of agreement

Heads of agreement are used when a contract is important but inchoate. They are used while negotiations are ongoing and the parties want to put down on paper what has been agreed and clarify what has not been agreed. Heads of agreement are also used when the parties want to indicate bona fides and/or give formal commitments in relation to conduct of the negotiations.

This heads of agreement document comes in four flavours:

• business venture - a generic version for a business deal not falling within the other categories;
• services - to be used in the context of negotiations for a material services agreement, such as an MSA our outsourcing contract;
• goods - a proposed contract, the key provisions of which include obligations for one party to supply physical goods or products to the other;
• software licence - for negotiations over a software licence arrangement, whether or not including support and maintenance.

Typically, heads of agreement include both binding and non-binding clauses. A binding clause is one that may, in principle, be enforced by means of court proceedings for breach of contract. It is crucial when preparing heads of agreement to be clear about which clauses are binding and which are not.

Although the negotiating parties may be in a position to agree some of the key terms of a proposed contract, that does not mean that those provisions, as set out in the heads of agreement, will be binding. The core commitments of a contract tend to stand or fall together. For instance, you cannot (or at least should not) agree a price without knowing the nature and scope of services or goods being bought.

The binding provisions of heads of agreement will tend to be ancillary clauses dealing with issues that arise out of the negotiations themselves, although of course the same issues may arise out of the main contract.  If heads of agreement include confidentiality or non-disclosure clauses, they will usually be binding – as will non-solicitation clauses designed to prevent the parties from poaching each other's personnel.

Sometimes, heads of agreement will incorporate exclusivity clauses committing one or both parties to refrain from entering into competitive negotiations with third parties. These clauses may be binding, but equally they might merely state the good intentions of the parties.

To be clear, heads of agreement are not a substitute for a full contract - if the parties were in a position to agree all the terms and conditions of the contract, then they would not need heads of terms. They could skip the starter and move straight to the main course. Just because, in practice, businesses do sometimes conduct ongoing business on the basis of flimsy legal documentation, does not mean that this is a good idea.

1. Definitions
2. Term
3. Legal enforceability
4. Negotiations
5. Exclusivity
6. No exclusivity
7. Proposal
8. Proposed Customer obligations
9. Proposed financial arrangements
10. Non-solicitation of personnel
11. Confidentiality obligations
12. Termination
13. Effects of termination
14. Responsibility for costs
15. Equitable relief
16. General

As a services provider negotiating with an enterprise customer, will these documents cover our commercially-sensitive information?

The default text in the service-specific heads of agreement template includes confidentiality clauses protecting the information of both parties. There is a special definition of "Provider Confidential Information".  This falls under 3 main headings: first, the heads of agreement document itself; second, the proposal under discussion; and third, any information disclosed by the services provider to the customer.  Of course, you can and should adapt the definition to fit with your circumstances.

I've been asked to get heads of terms. Is this the same?

Most probably: "heads of agreement" and "heads of terms" are used interchangeably by most lawyers.