When Is a Heads of Agreement (HOA) Legally Enforceable?

Summary

• A heads of agreement (HOA) sets out the key commercial terms of a legal arrangement before a binding contract is signed, and can be used as a negotiating tool to demonstrate intent to collaborate in scenarios such as business sales, joint ventures, or new business formations.
• An HOA is rarely legally enforceable as parties typically agree it will be non-binding, meaning either party can withdraw from the transaction without accountability, but it can be made binding by including an express clause to that effect along with accurate party details, proper signatures, and all essential contract terms.
• Key contents of an HOA include background context, each party’s contributions, confidentiality obligations, conditions precedent to the transaction, legal expense responsibilities, applicable law, and a clause clearly stating whether the document is binding or non-binding.
• This article is a guide to heads of agreement for businesses in Australia, explaining when to use an HOA, what it should include, and when it will be legally enforceable.
• LegalVision is a commercial law firm that specialises in advising clients on commercial contracts and business transactions.

Tips for Businesses

Always include a clear clause in your HOA stating whether it is binding or non-binding to avoid uncertainty about the parties’ obligations. If you intend the HOA to be binding, ensure all essential contract terms are addressed, party details are accurate including full legal names and ACN or ABN, and the document is properly signed and dated. Move promptly to finalise a comprehensive binding contract after signing an HOA to ensure the formal agreement governs the relationship.

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On this page

• When Should You Use an HOA?
• What Does an HOA Include?
• When Is an HOA Enforceable?
• Key Takeaways
• Frequently Asked Questions

Before signing contracts and entering into formal legal relationships, many businesses first choose to enter into a heads of agreement (HOA). An HOA outlines the key commercial terms of the arrangement and can be used as a tool for negotiations. When entering into an HOA, it is important to consider whether it is legally binding, so you understand any risks involved. This article explains when you should use an HOA and when it will be legally enforceable.

When Should You Use an HOA?

You will use an HOA to set out the key commercial terms of a legal arrangement before entering a binding contract. You can use it as a negotiating tool and demonstrate a strong intent to collaborate.

Some example scenarios where you might need to use an HOA include if you are:

• selling your business and wish to negotiate the terms of the sale before agreeing to the legal terms in a formal contract;
• planning to enter a collaborative arrangement with another business to conduct research where each party provides funding and resources; or
• in discussions to form a new business which relies on the skill set of another party. 

What Does an HOA Include?

Because an HOA intends to cover the key commercial terms of a legal relationship, it can include anything relevant to what you have agreed to with the other party. Generally, you can expect it to outline:

• some background that contextualises the parties’ relationship so far and their intent to enter a formal relationship;
• what each party will bring to the table;
• what information must be kept confidential;
• conditions that need to be met for the transaction to occur;
• that each party has received advice and will pay for its own legal expenses;
• some standard clauses, such as the applicable law and how to change the terms of the document.

Importantly, the HOA will also include a clause relating to whether the document is binding or non-binding.

When Is an HOA Enforceable?

An HOA is rarely legally enforceable because parties often agree that it will be a non-binding document. This means that if the other chooses to pull out of the transaction, you will not be able to hold them accountable for this.

If you would like it to be binding, you must include a clause within the document stating that it is legally binding.

If you do intend for the HOA to be binding, you should also make sure that:

• the parties’ details are accurate and include the full legal name and ACN or ABN;
• it is properly signed and dated; and
• all essential terms of a contract are addressed.

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Key Takeaways

An HOA is an important document which sets out the legal obligations of both parties before they enter into a formal agreement. It will rarely be enforceable because it usually precedes a binding and more comprehensive contract. The key item to look out for is a clause setting out the binding or non-binding nature of the agreement.

If you have any questions about HOAs, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee.  To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.

Frequently Asked Questions