“I have been in negotiation to sell my business, and my buyer has just withdrawn from the deal. Can I have the payment from the buyer?”

That question summarises classic enquiries we receive in a commercial transaction. One of the first things we would ask is what has been agreed between the parties – do you have written heads of terms agreed between the parties?

What are heads of terms anyway?

Heads of terms are also often called as “letter of intent”, “memorandum of understanding”, “pre-contract protocol”, “comfort letter”, “term sheet” or “heads of agreement”. They set out the main terms of a deal agreed in principle between the parties during negotiations, while the finer points are outstanding.

Why you should have heads of terms?

Heads of terms provide a framework for the final contract, as they clarify what terms have been agreed between the parties. When the heads of terms are agreed, there is an understanding that the main terms are not to be materially changed, demonstrating that the parties are serious about the deal and morally committed. By having a written form of heads of terms, it would also help reduce numerous meetings and/or email toing and froing between the parties.

Do heads of terms form a contract?  Are they legally binding? 

That depends upon the facts, the parties’ intention and conduct in each case. Typically heads of terms are agreed in the context of ongoing negotiations, and may not be legally binding if it is clear between the parties that the said heads of terms are not to become legally binding until some further conditions have been met and/or further terms agreed.

In the UK, if any provision of the heads of terms is expected to be legally binding, the usual requirements for the creation of a valid contract must be fulfilled – for example, we would expect to see certainty, consideration/ payment, and parties’ intention, etc. Please note that outside the UK, heads of terms may be dealt with differently, and local law advice should be sought in the case of cross-border transaction.

In our view, the parties should always avoid entering into legally binding heads of terms (unless it is clearly agreed that specific issues are to have legal effect) until each party has had an opportunity to identify and agree key terms, and the parties are in the position to enter into the transaction.

Who prepares heads of terms?

Anyone can prepare heads of terms. It does not have to be a lawyer who drafts heads of terms. But whoever is preparing them, it is vitally important that all the necessary key principles are identified and dealt with within the scope of the transaction.

Good heads of terms should save parties’ time and minimise disputes. They should also make clear what is agreed and whether anything (if so, what) is subject to further negotiation and/or condition(s). The parties should also identify what documents/agreements will be necessary to achieve the transaction they want – consider, for example, if there is need for exclusivity, confidentiality, and/or options, and who pays what (costs), and if any undertaking is required.

We can prepare effective heads of terms for you. If it relates to your property transactions contact Mayumi Hawkes, and if it is about your share or asset sale or purchase Karen Blakesley.

What about the payment?

If you have agreed under a legally enforceable provision (which in itself can be very tricky – as explained above) or by a separate (legally binding) agreement that certain sum be payable in respect of the commercial transaction, then quite likely yes. The terms of such payment must be clearly set out as a legally binding and enforceable agreement.

If there is no such agreement for payment, but you think you should be entitled to seek payment from the other party, you might like to consider carefully whether you have suffered loss or damage as a result of a wrong for which the other party is responsible, for example, where:-

  • the other party breached contract; and/or
  • the other party breached its duty; and/or
  • you made payment by mistake; and/or
  • you discharged other party’s debt or provided some work/goods, where there is no contract.

The above are just some examples of what you might like to examine. If you think you have a case, then please contact our dispute resolution team.