We are often asked what are the differences between a binding contract and a Heads of Agreement (HOA).
Under Australian law, a binding contract basically has five elements, and they are:
- Offer and Acceptance
- Consideration
- The intent to create a legal relationship
- Capacity
- Certainty
A binding contract does not always have to be in writing, even though in some instances it is a lawful requirement. For example, as required by certain Acts or relevant legislation.
A binding contract can be verbal or even through the actions of the parties.
In business it is always important to understand how a binding contract differs from a HOA.
Often a HOA can be referred to as a letter of intent, term sheet or even a memorandum of understanding.
We often explain to clients it should be looked at as the pathway forward and a roadmap to achieve the outcomes the parties want.
Generally, a HOA is entered into at the beginning of a proposed deal or transaction and is used to reflect the intentions of the parties subject to legally formalising the details of the transaction.
It is important to note that whilst it is often an indication of the intent to enter into a more formal relationship it can be subject to a whole range of issues such as:
- Confidentiality
- Due diligence
- Employees retention
- Exclusivity
- Finance
- Third party consent or permission
- Release of securities
- Restraint of trade
These are often referred to as conditions precedent and they must be satisfied or the requirements waived before proceeding to a formal binding contract.
If it is your intention that any HOA is non-binding it must be specifically stated and generally expertise in drafting is required to ensure the right result is achieved.
If it is your intention to have certain parts of a HOA to be binding that needs to be clearly defined as well.
How can FC Lawyers help with your Heads of Agreement?
Our business and corporate team has assisted numerous parties with negotiating heads of agreements in a range of industries and professions.
Contact us to discuss your options with a heads of agreement or any of your commercial legal needs.
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