When are Heads of Agreement Enforceable?

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When are Heads of Agreement Enforceable?

February 1, 2022         openlegal

A Heads of Agreement (HOA) is a pre-contractual document that sets out the key terms of a proposed agreement between parties. It sets out a framework for the parties to then settle on a final contract, lists key terms of the agreement, and can be used to induce investors by demonstrating the commitment of the parties. 

Is a HOA legally binding?

The general presumption is that a HOA is not binding as it is merely a prelude to a formally binding agreement. This means any terms included in the HOA don’t need to be included in the final contract, and that one party can even back out of the transaction altogether with no legal consequences. 

However, a HOA can be made legally binding by including a clause in the document that states it is enforceable. It must then satisfy the four elements necessary for a contract: offer, acceptance, intention and consideration. 

If you do not wish the HOA to be binding, it is essential to carefully review it to determine whether such a clause is included. 

Regardless, to avoid future complications it is generally a good idea to address this enforceability issue in every HOA with a short clause acknowledging whether the parties wish for it to be binding or not.

Speak to us if you have any questions around commercial contracts.

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