Heads of Agreement (HOA): Balancing Commercial Certainty and Legal Risk

Key Takeaways

Heads of Agreement (HOA) outline the key terms of a proposed agreement before a formal legally binding contract is signed. A well drafted HOA streamlines commercial transactions by setting clear objectives, reducing negotiating time and ensuring alignment between parties. However, poorly structured HOAs can lead to unintended legal obligations. Courts assess the enforceability of HOAs based on the intent of the parties, as established in Masters v Cameron (1954) 91 CLR 353 (Masters Case). To be effective, a HOA must strike the right balance – detailed enough to provide clarity but not so prescriptive that it unintentionally binds the parties beyond their intent.

Purposes and Benefits

A HOA serves as a document used in pre-contractual negotiations that helps the parties:

• Define key commercial terms and conditions precedent;

• Prevent misunderstandings and negotiation setbacks;

• Establish confidentiality, exclusivity and due diligence obligations; and

• Set expectations for good-faith negotiations and transaction timelines.

Too much detail can cause delays and increased costs, while too little detail may leave critical terms unresolved.

Legal Risks and Enforceability

HOAs may be binding, partially binding or non-binding. Masters Case categorises them as:

1. Binding immediately, with formal documents to follow.

2. Binding only after formal documents are executed.

3. Non-binding until a final contract is signed.

The Court assesses intent through wording and conduct, as seen in cases like Darzi Group Pty Ltd v Nolde Pty Ltd [2019] NSWCA 210 (where partial performance indicated intent to be bound) and Casdar Pty Ltd v Fanous [2017] VSC 616 (where statutory non-compliance prevented enforceability).

Best Practice for Structuring HOAs

To ensure a HOA is binding it should:

• Clearly state binding intent and identify enforceable clauses (e.g. confidentiality, exclusivity); and

• Make obligations explicit and sufficiently detailed.

To avoid unintended obligations, the parties should:

• Label the document as non-binding if that is the intent.

• Use a sunset clause to void the HOA if no final contract is reached.

• Avoid performing obligations before executing the final agreement.

Implications for Commercial Agents

Commercial agents should ensure HOAs are clear, legally sound and aligned with commercial objectives by:

• Using well-drafted templates with guidance notes.

• Clarifying parties’ intentions before drafting.

• Avoiding over-prescriptive terms that may create unintended legal obligations.

Conclusion

A HOA is a valuable tool in commercial transactions, but its enforceability depends on precise drafting and clear intent. Properly structured, it enhances deal certainty while minimising legal risks.

For assistance with transactions involving a HOA, please contact one of our people.

Ron Zucker 0410 590 111

Eollyn Cortes 0478 727 395

Sagang Chung 0431 435 333

Julia Zou 0426 670 202