Heads of Terms. Why you should use them & document template

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1 Heads of Terms Why you should use them & document template October 2012 Good to have on your side flintbishop.co.uk 1

2 Get ahead of the game: get some heads of terms Why use heads of terms? When you are thinking about entering into a contract, it is always best to have the key proposed terms written down. A document which records these key terms is often referred to as heads of terms. Heads of terms have several functions, such as: Providing a useful point of reference to both parties Helping to focus the parties minds on what terms need to be agreed Showing the parties commitment to going ahead with the deal Reducing the legal costs of drafting the contract by ensuring that terms have been fully negotiated and recorded If you do not use heads of terms or thinking of revising your current heads of terms document, why not use our free heads of terms template on the next page. Heads of terms are not generally written in such a way as to be legally binding on the parties and our document is no different except that it contains a binding duty of confidentiality. Our heads of terms template provides an example of what heads of terms might look and we hope that you find it useful. If you would like any advice on using our template or some heads of terms tailored by us to suit you, please contact a member of the commercial contracts team. 2

3 SUBJECT TO CONTRACT Heads of terms In respect of (the Arrangement) Between Parties 1 2 Background This form sets out the principal terms and conditions which the above named parties is willing to enter into for the proposed Arrangement. With the exception of the confidentiality provisions set out below, the parties do not intend to be legally bound by these heads of terms and the Arrangement is strictly subject to the execution of a legally binding agreement. The parties agree to negotiate in good faith until execution of such legally binding agreement. 3

4 Terms Terms 1. Pre-Conditions Agreed Actions 2. Price/ wage 3. Payment terms Term Amount 4. Method of payment Interest 5. Party 1 s obligations 6. Party 2 s obligations 7. Governing law 8. Estimated time to completion The parties agree to negotiate in good faith with a view to executing a legally binding agreement on or before [DATE]. 9. Responsibility of legal costs 4

5 The Terms and the Arrangement are confidential to the parties and their advisers. Each party undertakes that it shall not at any time disclose to any person any confidential information which is disclosed by the other party in contemplation of the Arrangement except to its employees, officers, representatives or advisers who need to know such information for the purposes of the evaluation of the Arrangement and the negotiation of the legally binding agreement. For the purpose of this letter, confidential information shall mean any information which concerns which concerns the business, affairs, customers, clients or suppliers of a party or of any member of the group of companies to which that party belongs and which is expressly identified by that party as being confidential or which the reasonable business person would identify as confidential. No party shall use the other party s confidential information for any purpose other than the evaluation of the Arrangement and the negotiation of the legally binding agreement. This letter is for the benefit of the parties to it and is not intended to benefit, or be enforceable by, anyone else. We confirm our agreement to the above.... Signed by [PARTY 1] OR [NAME OF DIRECTOR] for and on behalf of [PARTY 1] Print name: Date:... Signed by [PARTY 2] OR [NAME OF DIRECTOR] for and on behalf of [PARTY 2] Print name: Date: 5

6 How to Complete the Heads of Terms Template Arrangement Define in one sentence the proposed agreement e.g. supply of cleaning services or sale of 5 light aircraft Parties It is important to provide full name of the parties. The question to ask is who you are contracting with, an individual, company, partnership or otherwise. If it is a company, make sure you use the registered company name and not the trading name or affiliates. Background Use this space to write a summary of the transaction and anything noteworthy about the parties. Terms The following numbering correlates with the number next to the relevant term: 1. Pre-conditions Are there any pre-conditions that either party has to fulfill before commencement/ completion of the Arrangement? i.e. consents from relevant authorities (FSA, Competition Commission, Local Authority etc)/ licences, permits etc If so, state what they are, who is responsible for achieving the pre-condition and the deadline for the pre-condition(s) to be fulfilled. 2. Price What is the price of the Arrangement and in what currency? This could be the price for the goods and/ or services OR the standard wage/ commission payable to the other party. 6

7 3. Payment Terms Is the price paid in full at completion or is it paid in installments? If so, outline the term (length of repayment), the amount of each payment and the interest rate attached (if any) and the date on which each installment is due. 4. Method of Payment Outline the method of payment, whether by BACS, CHAPS or otherwise. If to a specific bank account, the following details will be useful. Bank: Account Name: Account Number: Sort Code: 5. & 6. Party 1/ Party 2 s Obligations Here consider whether there are any obligations which a party needs to fulfill as part of the Arrangement, these might include: Minimum sale/ purchase targets Provision of: o Employees o Premises o Computer systems o Use of facilities o Equipment o Promotional materials Reporting to the other party every (select frequency) Keeping an up to date record of (sales, customer list, product list etc) Keeping a level of stock/ goods in certain conditions Delivery to a specific location Not all of the above will apply but if there is any specific conditions either party wish to impose, it should be noted in the space provided. 7

8 7. Governing law A governing law clause should be included as this enables the parties to specify the system of law which will apply to the interpretation of the agreement and its effect if a dispute arises. It is important to decide on this at the outset as the redress you will have if a dispute does arise will be dependant on the law which is applied. Mostly, agreements which are formed in England will be governed by the law of England and Wales. However parties can opt for a different system if it is more appropriate. If the Agreement is not governed by the law of England and Wales, then a qualified solicitor in the chosen jurisdiction will need to advise on, and draft, the agreement. 8. Estimated time to completion Consider when both parties will be in a position to sign the legally binding documents. If there are any operational matters or pre-conditions, consider the likely timescale to resolve or obtain the relevant consents. It is important that you put together a full contract as soon as possible after signing the heads of terms which should not be used instead of a contract. 9. Responsibility of legal costs Consider whether each party should pay their own legal costs or whether one party should pay for all. Confidentiality Provisions This section is legally binding and so you will need to make sure that the information provided to you is kept confidential. If the information that you will be sharing is sensitive then you should not rely solely on this document and should sign a separate non-disclosure agreement. This is a guidance note only and does not form part of the template. Any information should be recorded on the heads of terms template. 8

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