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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.

Either way, you should ensure that your HOA includes an acknowledgment of whether it is legally binding to avoid any confusion.

You should also prepare and sign a binding agreement shortly after signing the HOA so that the binding agreement’s terms govern the parties’ relationship.

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.

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, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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