Heads of Terms vs Contract
Last updated: February 2025
Quick Comparison
| Aspect | Heads of Terms | Contract |
|---|---|---|
| Binding nature | Generally not binding (except specified clauses) | Fully legally binding |
| Detail level | High-level commercial terms only | Comprehensive terms including legal boilerplate |
| Purpose | Records agreement in principle before formal docs | Creates enforceable obligations between parties |
| Stage in process | Early stage; before the contract | Final stage; the binding agreement |
| Legal costs | Lower; less detailed drafting required | Higher; full legal review and negotiation |
What Is a Heads of Terms?
A preliminary document outlining the key commercial terms agreed in principle between parties before a formal contract is drafted.
Key Features
- • Sets out the main deal points agreed in principle
- • Generally not legally binding except for specified clauses
- • Provides a framework for drafting the full contract
- • Often includes binding provisions for confidentiality and exclusivity
Best For
- • Complex deals requiring negotiation before full documentation
- • M&A transactions and property deals
- • Establishing agreement on key terms before incurring legal costs
What Is a Contract?
A legally binding agreement containing all essential terms that the parties intend to be bound by and enforceable in court.
Key Features
- • Fully binding and enforceable
- • Contains all commercial, legal, and operational terms
- • Both parties intend to create legal relations
- • Executed through signature or deed
Best For
- • Formalising any legally binding business arrangement
- • Providing certainty and enforceability
- • Documenting the complete terms of a deal
When to Use a Heads of Terms
Use heads of terms for complex deals where you want to confirm agreement on key commercial points before investing in full legal documentation. Common in M&A, property transactions, and major commercial partnerships.
When to Use a Contract
Use a contract when you are ready to create binding legal obligations. This is the document that governs the relationship and provides enforceability.
Which Does Your Business Need?
For simple deals, you can often go straight to a contract. For complex transactions, heads of terms help ensure both sides agree on the fundamentals before incurring significant legal costs. Always clearly label which provisions in heads of terms are intended to be binding.
FAQ
Are heads of terms binding under English law?
Generally no. Heads of terms are usually expressed as subject to contract and not legally binding. However, specific clauses such as confidentiality, exclusivity, and costs undertakings are often intended to be binding and should be clearly labelled as such.
What should heads of terms include?
Key commercial terms such as price, scope, timeline, and conditions precedent. Also include binding clauses on confidentiality, exclusivity periods, and governing law. Clearly state which provisions are binding and which are subject to contract.
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