Do I Need A Lawyer For A Heads Of Agreement?

Can you sign a heads of agreement now and sort out the full contract later? Often, yes - but only after you've checked exactly what you're agreeing to.

A heads of agreement can be a handy way to capture the main deal points before everyone spends time and money on a longer contract. The catch is that some clauses can bind you straight away, even if the rest of the deal is still being negotiated.

That means the real question isn't just whether the document is short or informal. It's whether it locks you into an exclusivity agreement, a deposit, confidentiality, price, timing or other obligations before you're ready.

What Is A Heads Of Agreement In NZ?

A heads of agreement in NZ is usually a short pre-contract document that records the key commercial terms of a proposed deal.

You might also hear it called a:

• term sheet
• memorandum of understanding
• letter of intent
• deal summary
• proposal agreement

The name doesn't decide whether it's binding. What matters is what the document says, how clear the terms are, and whether the parties intended to be legally bound.

Heads of agreement are common when you're negotiating things like:

• a new commercial partnership
• a licensing arrangement for intellectual property
• a software or IT services agreement
• a distribution arrangement
• an investment round or founder arrangement
• a franchise-style expansion discussion

They can be useful because they help you see whether you're broadly aligned before committing to a full contract. They can also stop the deal drifting because key items like price, timing, deliverables and approval steps are written down.

Where you need to be careful is treating the document as harmless just because it's not the final agreement. In New Zealand, a short document can still create legal obligations if the wording points that way.

If the heads of agreement relates to a lease, land transaction, or buying or selling a business, you should speak with a New Zealand lawyer or specialist adviser who acts in that type of transaction. Those deals often involve extra steps and risks that sit outside an ordinary commercial contract review.

Is A Heads Of Agreement Legally Binding In New Zealand?

It depends. A heads of agreement can be fully binding, partly binding or non-binding, depending on the wording and the parties' intentions.

New Zealand contract law looks at the substance of the arrangement. If the key terms are certain enough and the parties intended to create legal obligations, the document may be enforceable even if everyone expected a longer contract later.

Common wording like subject to contract can help show that the main deal isn't binding yet. But that phrase won't always protect you if other parts of the document clearly say they're binding.

A well-drafted heads of agreement often separates the clauses into two groups:

• Non-binding commercial terms: for example, proposed pricing, scope, timing and conditions that still need to be agreed in the final contract.
• Binding process terms: for example, confidentiality, exclusivity, deposit handling, costs, governing law and how negotiations can be ended.

Electronic signing can also be valid in many New Zealand business contexts under the Contract and Commercial Law Act 2017, so don't assume a digitally signed document is less serious than a paper one.

There can also be Fair Trading Act 1986 risks if a party makes misleading claims during negotiations. For example, if someone says key approvals are already in place when they aren't, that can create commercial and legal problems even before the final contract is signed.

The practical point is simple: if you don't want to be bound yet, the document needs to say that clearly and consistently.

What Terms Can Bind Me Before The Main Contract Is Signed?

The terms most likely to bind you early are the ones dealing with behaviour during negotiations, not just the final deal outcome.

These are the clauses to read slowly before you sign.

Exclusivity

An exclusivity clause can stop you from talking to other potential partners, investors, suppliers or buyers for a set period.

That might be fine if the other party is seriously progressing the deal. But if the period is too long or there are no milestones, you could lose momentum and miss better opportunities.

Check:

• how long exclusivity lasts
• whether it can be extended
• what you're blocked from doing
• whether the other party must meet any deadlines
• what happens if they slow down or go quiet

Deposits And Upfront Payments

A deposit clause can bind you if it clearly states when the money is payable and whether it's refundable.

Watch for wording that says a deposit is non-refundable even if the final agreement is never signed. If that's the commercial deal, make sure you understand the risk. If it isn't, the document should say when the deposit must be returned.

Confidentiality

Confidentiality clauses are often intended to bind immediately. That makes sense because you may be sharing pricing, customer lists, product plans or investor information before the full agreement is ready.

If personal information is being shared, the Privacy Act 2020 may also matter. You should think about what personal information is being disclosed, why it's being shared, who can access it, and how it will be stored or deleted.

A Worked Example

Say Aroha runs a SaaS startup in Wellington. A distributor asks her to sign a two-page heads of agreement.

It says the proposed distribution agreement will run for three years, the distributor will pay a $15,000 deposit, and both parties will negotiate the final contract in good faith. It also says Aroha can't speak to any other New Zealand distributor for 90 days, and the deposit is non-refundable.

Two weeks later, Aroha realises the distributor won't agree to any minimum sales targets. She wants to talk to another distributor, but the exclusivity clause is already binding. She may need to wait out the 90 days, and the deposit wording could become a fight if the deal falls over.

A clearer heads of agreement could have said exclusivity ends after 30 days unless the distributor approves the final sales targets, and the deposit is refundable if the final agreement isn't signed by a set date.

Should I Get A Lawyer To Review A Heads Of Agreement?

Yes, it's usually worth getting a legal review before you sign if the deal matters to your business or the document includes binding terms.

You may not need a long memo or a heavily marked-up document. Often, what you need is a practical review that answers:

• which clauses are binding now
• which commercial terms are still open
• whether the wording matches what you think you've agreed
• what risks you're taking on before the final contract
• what changes would protect your position without slowing the deal down

A heads of agreement lawyer will usually focus on the risk points that create pressure early: exclusivity, deposits, confidentiality, costs, approvals, timing and termination.

A term sheet review in NZ can also be helpful for startup fundraising. For example, an investor term sheet might set out valuation, shares, board rights, information rights, founder vesting and conditions before completion. Some terms may be intended as non-binding, while confidentiality and exclusivity may start right away.

If your company is signing, think about internal authority too. Under the Companies Act 1993, directors need to act in the company's best interests and with proper care. Depending on your constitution, shareholders agreement or board approvals, you may need director or shareholder sign-off before committing to certain terms.

If your deal involves IP, check ownership carefully. If you're licensing a brand, software or creative work, the heads of agreement should be clear about whether anything is being transferred, licensed or simply discussed. Trade mark rights can be checked through IPONZ, but the document still needs to say exactly what rights are being granted.

Templates can be useful for spotting common headings, but they often miss deal-specific risks. A heads of agreement works best when it's tailored to the transaction, the bargaining position and what you're willing to commit to now.

What Should A Heads Of Agreement Include?

A good heads of agreement should include the key deal terms, but it should also say which parts are binding and which parts aren't.

Here's a practical fill-in outline you can use to check whether the document has the right structure. This isn't a finished legal document, and a lawyer should tailor it before you use it.

1. Parties: write the full legal names, NZBNs if relevant, and who is signing for each party.
2. Background: briefly explain the proposed deal and why the parties are negotiating.
3. Proposed Transaction: describe the arrangement in plain language, such as a licence, partnership, investment or service agreement.
4. Key Commercial Terms: set out price, scope, timing, milestones, deliverables and any conditions still to be agreed.
5. Binding And Non-Binding Terms: state clearly which clauses bind the parties now and which are only indicative.
6. Exclusivity: say whether exclusivity applies, how long it lasts, what conduct is restricted and when it ends early.
7. Confidentiality: identify what information is confidential, who can use it, permitted disclosures and how long the obligation lasts.
8. Deposit Or Costs: state any amount payable, due date, GST treatment if relevant, and whether the money is refundable.
9. Approvals And Conditions: list any board, shareholder, funder, IP, regulatory or third-party approvals needed before final signing.
10. Timeline: set target dates for the final agreement, information exchange and any conditions.
11. Ending Negotiations: explain how either party can walk away and what obligations survive.
12. Governing Law: confirm New Zealand law applies, if that's the intended position.

The most useful clause is often the binding status clause. It should be unmissable. If only confidentiality and exclusivity are binding, say that. If the price isn't binding until a final contract is signed, say that too.

Be careful with vague phrases like the parties agree to proceed or the parties will finalise the agreement as soon as possible. Those words can create arguments about whether someone has already committed to the deal.

How Much Does A Heads Of Agreement Review Cost?

The cost depends on the length of the document, the value of the deal, how many issues need changing and whether you need negotiation support.

There are a few common options.

Free Template

A free template can help you understand the usual structure. It's the lowest-cost option, but it can be risky if you don't know which clauses should be binding.

Templates also won't know your bargaining position. For example, a 90-day exclusivity period might be acceptable in one deal and far too restrictive in another.

Online Fixed-Fee Review

An online fixed-fee review can be a good middle option if you want clear comments, suggested changes and a practical view on what you're signing.

For this kind of review, you should expect the legal team to check:

• whether the document is binding, non-binding or partly binding
• whether the commercial terms are clear enough
• what happens if the final contract isn't signed
• whether confidentiality, deposits and exclusivity are workable
• what approvals or next documents are needed

You can ask for a fixed fee quote up front, so you can decide whether the review makes sense before going ahead.

Traditional Hourly Advice

A traditional firm billing by the hour may suit a high-value or complex transaction, especially where several advisers are involved.

The trade-off is that the final cost can be harder to predict if there are several negotiation rounds. If you go down this path, ask what's included, who will do the work, and when you'll receive comments.

Whichever option you choose, the goal is the same: know what binds you now, what remains open, and what needs to happen before you sign the final agreement.

Key Takeaways

• A heads of agreement in NZ can be binding, non-binding or partly binding, depending on the wording and the parties' intentions.
• The biggest early risks are usually exclusivity, deposits, confidentiality, costs and unclear wording about whether the deal is already agreed.
• If you don't want the main deal to bind you yet, the document should clearly say the commercial terms are subject to a final signed agreement.
• Confidentiality and privacy obligations can start before the full contract, especially if customer, employee or founder information is being shared.
• A lawyer can help you spot accidental binding terms and adjust the wording before you lose leverage in the negotiation.

If you'd like help with reviewing or preparing a heads of agreement, checking binding terms, or tightening confidentiality, exclusivity and deposit clauses, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.