Why Enter Into A Heads Of Agreement?

A Heads of Agreement can be a great way to negotiate the key terms of a commercial contract before entering into a formal, long-form contract. 

Is A Heads Of Agreement Legally Binding? 

In New Zealand, a Heads of Agreement is typically not intended to be legally binding.

This means that if the future contract contemplated by the Heads of Agreement doesn’t end up going ahead, both parties can walk away from the deal without any obligations to the other party. 

To avoid any misunderstandings, a Heads of Agreement will usually clearly state that it is not legally binding, except for any specific provisions that the parties wish to enforce.

For instance, parties may agree that a confidentiality clause within the Heads of Agreement is binding. Such a clause would stipulate that the content of the Heads of Agreement is strictly confidential, and that this confidentiality obligation is legally enforceable on the parties even after the Heads of Agreement has expired. 

Why Not Go Straight To A Formal Contract? 

Parties may opt for a Heads of Agreement to negotiate the essential terms before incurring the time and expense associated with drafting comprehensive contracts. 

Engaging in the detailed drafting of long-form contracts can be wasteful if the parties do not ultimately agree on the fundamental terms of the arrangement.

For example, in the sale of a business in New Zealand, a Heads of Agreement can be useful to outline preliminary considerations such as the purchase price, deposit, assets included in the sale, settlement period, and any restraint of trade provisions, along with the warranties and indemnities of each party. 

Should there be a disagreement on a critical aspect, such as the inclusion of a particular asset in the sale, the time and money spent on a formal Business Sale Agreement would be saved by having a preliminary Heads of Agreement.

Do I Have To Enter Into A Heads Of Agreement? 

It is important to note that in New Zealand, there is no legal obligation to enter into a Heads of Agreement. 

If the parties are confident that they have reached an understanding and the terms are relatively straightforward, they may proceed directly to drafting a formal contract.

What Is Typically Covered In a Heads of Agreement?

The content of a Heads of Agreement in New Zealand can vary significantly to reflect the key terms of the specific commercial arrangement being negotiated. 

Typically, a Heads of Agreement will outline:

• The parties to the agreement
• Each party’s rights and obligations under the commercial contract
• The purchase price (if any)
• Confidentiality requirements
• The timeframe for the agreement

Need Help?

Having a lawyer draft your Heads of Agreement will ensure that all the key terms of the arrangement are addressed, putting you in a strong position to finalise the deal.

If you think your upcoming commercial agreement in New Zealand could benefit from a Heads of Agreement, please feel free to get in touch at 0800 002 184.

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