As a general rule, the more complex a potential business deal, the more clarity is needed when negotiating terms. That’s why terms sheets and heads of agreements are handy tools to get you into the home stretch of contract negotiations. 

What are terms sheets and heads of agreements?

Terms sheets and heads of agreements are often used to set out the most significant aspects of contract negotiation. Whether a document is titled terms sheet, heads of agreement or memorandum of understanding is usually a matter of style. They can mean the same thing.

For simplicity, we’ll refer to them as terms sheets.

Why are terms sheets used?

Terms sheets are useful to clarify various aspects of negotiations. They can make the process more efficient. After all, there’s nothing worse than having contract negotiations stall due to a heavy track. 

For example, terms sheets may set out:

  • The purpose and goals of the negotiations
  • The terms of the proposed agreement
  • The deadline for reaching an agreement
  • The rights, responsibilities and obligations of each party
  • Dispute resolution methods. 

Are terms sheets legally binding?

Often, terms sheets aren’t legally binding. They are a precursor to the parties entering into a legally binding contract which sets out the rights and obligations of each party. 

Terms sheets are often used as a step along the way to ensure the parties have the same understanding of the proposed agreement. 

But the parties must understand, if the terms sheet isn’t legally binding, there’s not yet any commitment or legal obligation on either party to enter into the agreement. 

Sometimes, terms sheets can be legally binding. For example, in highly complex agreements, terms sheets can be used to allow initial work or investigations to commence while the final contract is legally vetted. The more complex the deal, the longer this may take. There may be an obligation for the work to be performed, paid for, and to be conducted safely. The terms sheet should require the parties to act in good faith in accordance with the proposed terms of the agreement.

Because terms sheets are used for different reasons, they should always specify whether they are legally binding. 

When should terms sheets be used?

For straightforward transactions, it’s often simpler and more efficient for parties to cut to the chase and enter into a contract, rather than drawing up a terms sheet. But there are some specific situations in which we recommend using terms sheets. For example:

Complex or heavily conditional transactions

Sometimes transactions that are complicated or come with many conditions require the parties to commit to a due diligence process. This can be a huge drain on resources, so a terms sheet can give the parties confidence the negotiations are still on track and the parties remain committed.

Publicly listed companies

For companies listed on the Australian Stock Exchange (ASX), legally enforceable terms sheets are useful. These companies often have disclosure obligations that arise when a binding terms sheet is signed, but not when other preliminary documents are executed. The disclosure obligations can help companies decide whether to proceed with the contract.
Terms sheets can keep complex contract negotiations on the front foot. It’s not necessary for every situation, and we recommend that you seek our legal advice before entering into any contract discussions. 

We help you negotiate the track and jump the hurdles. Get in touch today to find out more.

DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.