It is usual for heads of terms not to have legal effect and be non-binding agreements between the parties. Issues regarding the legality of these documents arise when parties wish to include terms relating to confidentiality, costs and exclusivity. For the heads of terms to binding they must satisfy the criterion for a valid contract:
- the terms must be certain i.e. the payment of reasonable costs under the terms of the agreement is enforceable and
- there must be consideration in the form of a promise, payment, action or forbearance from the party benefitting from the agreement to the other party, unless the terms are executed under seal (including authorised signatories as set out in s44 (4) Companies Act 2006).
Where parties have created legally binding heads of terms third party rights also need to be considered. If the terms result in undesired third party rights being created, the parties would need to include an express exclusion clause. However third party rights may be of benefit to parent or subsidiary companies, who want to benefit from confidentiality provisions, provided the terms purport to confer a benefit on them and the term gives an enforceable right under the Contracts (Rights of Third Parties) Act 1999.
It must also be noted that statements made in the heads of terms could give rise to liability for misrepresentation, negligent misstatement or fraudulent statement. Hence it is essential that heads of terms are drafted correctly to minimise your liability.
Muhammed Poswall is a legal assistant to Izaz Ali (Izaz.Ali@lawdit.co.uk). Izaz is a commercial lawyer who specialises in information technology law and intellectual property law with an emphasis on IT, escrow, online and off-line contracts, and the buying and selling of online businesses.