Heads Of Agreement Notes

HEADS OF AGREEMENT ("LETTER OF INTENT")

Purpose

• to provide written confirmation of the main terms agreed in principle, and to focus the minds of the parties on the commercial deal they believe has been struck.

• sets out basis on which they are prepared to proceed, without first committing cost and time of full investigation into target assets of company.

• Not meant to be legally binding, but are instead though to be "morally binding"

However, legal force is given to certain clauses which the parties intend to be binding (e.g. lock-out, confidentiality, or break fee arrangements).

Binding contract?

1. has there been offer and acceptance?

2. is there an intention to be legally bound? presumed for commercial relationships

3. is there consideration (which is not past)?

   1. normally DD costs paid for by B

   2. further confidential information about the company (past info given by S won't suffice)

"agreement to agree" is not legally binding, but it may be in some civil jurisdictions

Drafting:

• avoid language which is certain (e.g. "the following sets out the agreement between B and S" or "B shall")

• express the letter as conditional on the execution of a subsequent binding agreement

• expressly provide that the document "is not intended to be binding upon Signatories except where expressly provided otherwise"; and then expressly state in the clauses which are intended to be legally binding that they are legally binding.

Duty to negotiate in good faith?

• Provides a remedy should the client withhold critical pieces of information which would alter the opinion of the other party, or if they withdraw from the pre-contractual negotiations without good reason.

  • "negative interest damages" (i.e. damages that would put the other party in the position that it would have been in had the negotiations not taken place)

• Is there a duty?

  • Rome II provides that the choice of law provision, provided it has been freely negotiated, will determine the law for any connected non-contractual obligations.

  • If the letter of intent includes a clear selection of English law as the governing law, this would avoid the obligations of good faith.

• Recommended to include a clause providing that, until signing of agreement, the parties are entitled to break off negotiations at any time without incurring any liability to the other

Exclusivity clauses

1. Lock-in clauses - a positive obligation on the parties to negotiate with each other would be void under English law for uncertainty (but may valid be in the US, France, and some other jurisdictions).

2. Lock-out clauses - a negative obligation that the parties (and their employees and representatives) will not negotiate with anyone else may be valid under English law, but only where they are sufficiently certain as per Walford v Miles:

   1. good consideration - normally expressed as B committing time and expense to DD

   2. clear negative promise not to negotiate with other borrowers

   3. fixed time period - long enough to allow B to complete their investigation and decide...

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