Ordinarily, the purchaser and the vendor of a business will engage in negotiations, and proceed to enter into a Sale of Business contract once negotiation have been finalised. Sometimes, however, the two parties will enter into what is called a Heads of Agreement prior to any contract. If you enter into a Heads of Agreement, consider contacting a contract solicitor to determine the binding nature of the Agreement. A contract solicitor with experience in business law would be the most appropriate lawyer to speak with for advice.
Importance of a Heads of Agreement
Heads of Agreement are particularly relevant in both Victoria and NSW, as it is prohibited for business brokers to complete a sale of a business using the standard form contract (for NSW this is the 2005 Edition of the Contract for the Sale of Business). Business brokers will usually suggest to their clients that they enter into the Heads of Agreement as a gesture of good faith and as a promise to proceed to the sale.
It is worth noting that when a contract solicitor drafts the Heads of Agreement, it is typically not meant to bind the parties to the terms of the agreement. Heads of Agreements will generally be quite explicit as to whether or not the parties intend to be bound, and will sometimes be ‘subject to contract’. In many cases, the parties will not have agreed on the finer details of the agreement and, as such, the Heads of Agreement is more symbolic of the mutual intention to proceed more than anything else.
In some cases, the vendor will require a non-refundable (although deductable) holding deposit to be paid as a sign of commitment to the Heads of Agreement. This period allows the purchaser to make all necessary enquiries and conduct all necessary due diligence, and gives the purchaser assurance that the vendor will not contract with any other party during that period of exclusion. In the meantime, the contract solicitors from both sides can negotiate the terms and conditions of a more substantive contract.
Circumstances when Heads of Agreements are binding
Heads of Agreements, although ordinarily not legally binding, are in some circumstances enforceable. If the parties intend on making the Heads of Agreement a binding document, certain criteria must be met in terms of how the document is drafted and the details it should contain. For example:
- It will need to explicitly state that the Heads of Agreement is intended to be binding on all concerned parties;
- All relevant details of both parties will need to be accurate and up to date to ensure there is no doubt as to who the Agreement concerns;
- The Agreement should be signed by both parties and have the correct date. This will guarantee proper execution of the Agreement;
- All essential terms/conditions should be addressed; and
- A final clause should be drafted by your contract solicitor that stipulates how unsettled matters will be determined, e.g. by an external arbitrator or otherwise.
When two parties enter into the Heads of Agreement, it is usually as a sign of commitment to the agreement. While most of the time these agreements are not binding of the parties, they can be in certain circumstances. If you are unsure as to the binding nature of a Heads of Agreement you are considering entering, contact LegalVision on 1300 544 755 and speak with one of our contract solicitors.