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Why Use Heads of Terms?

When To Use (Non-binding) Memorandum of Understanding Templates?

Where two businesses propose to enter into a commercial arrangement with each other, they might begin negotiations with a view to reaching an initial agreement but want to avoid that agreement amounting to a legally binding contract. Their reason for doing so will usually be that they wish to recognise the agreement as a “deal” but they are at the same time aware that not only will their definitive commercial arrangement need to contain the basic aspects of the deal set out in their initial agreement, it will also need to comprise other terms as well as details of some practical matters. Their intention will be to ultimately negotiate, and set out in writing, all of that detail in such a way as to create a definitive final agreement. However, they intend that, in the meantime, they do not want their initial agreement to be legally binding on them since that would then run the risk of their being bound by an incomplete agreement and the additional risk of never managing to agree a detailed final agreement that supersedes the incomplete agreement.

In order to avoid an initial agreement being binding, businesses and other organisations will often prepare that initial agreement in the form of a non-binding Memorandum of Understanding (“MOU”), Heads of Terms (“HOT”) Letter of Intent (“LOI”) or “Term Sheet” (“TS”). Although such a document might bear any of these different titles, in essence the nature of the document will be the same in that by inclusion of suitable wording, it is made not legally binding. In this way it serves as a pre-contract non-binding document which states the intent of the parties to enter into a subsequent binding agreement that will contain all of the detailed terms and other aspects of the deal once all of those terms and other matters have all been fully agreed and set down in writing.

Recommendation: Download the Guidance Notes on Heads of Terms, Memoranda of Understanding, Letters of Intent and Term Sheets for a fuller explanation of using a pre-contract document.

Also Available Below: Memoranda of Understanding, Letters of Intent, and Exclusivity/Lockout Agreements and Clauses.

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