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In commercial dealings, there is a difference between certain types of legal agreements. Some amount to formal contracts, while others are slightly less – either progress reports for ongoing negotiations or agreements to agree at a later date. Usually, a heads of agreement (HOA) will fall into the latter category. 

An HOA is a ‘pre-contract’ document that the parties sign when they wish to record the key terms of their agreement without entering into a detailed and binding contract. However, if certain elements are present, a court may find that your HOA is legally enforceable. This article will detail these requirements. 

Is There a Binding Agreement?

In New Zealand, a legally binding agreement or contract forms once you accept a clear offer proposed by one individual or party. There must also be consideration, which occurs when something of value backs the acceptance. 

To legally enforce an HOA, there must be consideration. Such consideration may be:

  • payment;
  • a promise to provide goods or services; or
  • giving up a benefit, such as giving up the ability to sue the other contracting party. 

In determining whether an HOA can be enforceable on the parties involved, a court will look to both the words contained in the agreement and the background circumstances of the HOA. 

Two key elements will determine whether an HOA can be a legally binding contract:

  • agreement to essential terms; and
  • a common intention to create a legal relationship. 

Agreement to the Essential Terms

To form a legally binding document, the parties involved must agree to the essential terms of that transaction. A term will be essential if the contract could not go ahead without it. For example, in a sale of your business, the essential terms would include:

  • a detailed description of the business in question;
  • the party you are selling it to; 
  • the price; and 
  • the date when the buyer is taking over.

An HOA will usually contain these terms. 

However, other terms may also be essential to the contract. If you, or the party you are negotiating with, will only accept an offer in the presence of a particular term, then that term is essential to your contract. Such terms will be specific to the circumstances of each negotiation. 

For example, if you will only purchase a business in a particular region, then the region will become an essential provision of your agreement. Although this may appear unimportant to other purchasers, if this requirement is vital to your entry into the contract, it will be deemed essential. 

If an HOA is to be binding, there must be a mutual understanding of what terms are essential, and formal agreement to these provisions. It is best practice during negotiations or discussions to clarify the vital terms to you and acknowledge that you will not be prepared to commit yourself to any contract until you have reached agreement on those matters. Such disclosure will ensure that the HOA will not be enforceable until parties settle these crucial concerns. 

Intention to Create Legal Relations

An HOA will only be legally enforceable when the parties involved intend to immediately create a legal relationship with one another through the agreement. A court will infer this intention by a range of factors, such as the nature of the parties involved (companies, spouses, etc.) and statements made whilst the HOA is put together. 

An HOA will usually contain ‘agreement to agree’ terms. This is when the parties agree that they will decide on a particular matter, such as the payment amount, at a later date in the negotiating process. Previously, such provisions would inhibit an HOA from becoming legally enforceable, as it indicated that the parties did not intend to create legal relations. However, this is now not always the case in New Zealand. 

If the negotiating parties can infer an intention to enter into legal relations, phrases such as “left to be agreed” will not prevent a court from binding the individuals involved. Instead, such terms will be interpreted as the parties indicating that they understand that certain issues can be agreed upon in the future and that they intend to do so. 

Suppose you do not wish for an HOA to be legally enforceable. In that case, it is best practice to explicitly state in the written document that you do not intend for the HOA to create legally binding responsibilities. Such a provision will ensure that the other parties involved and the courts know that you do not intend for the HOA to create any legal relationship. 

Key Takeaways

A heads of agreement, or an HOA, is usually a non-binding legal document that will record the key terms of an agreement between parties. However, it may be legally enforceable if the requirements of a binding contract are present. Such requirements are a clear offer, mutual acceptance of the essential terms, consideration and a shared intention for the agreement to create legal relations. Therefore, it is crucial that you know what kind of status you wish your HOA to have and its contents before signing the agreement. 

If you are unsure whether an HOA is legally enforceable, LegalVision’s contract lawyers can help. Call us on 0800 005 570 or complete the form on this page.

FAQs

What is a heads of agreement?

A heads of agreement is a legal document that contains the key terms of an agreement between parties.

What should be in a heads of agreement?

A heads of agreement should contain matters that you and other negotiating parties want to be in a final, binding agreement. If you intend for the heads of agreement to be legally enforceable, it should contain any terms essential to your entry into the agreement.

Are signed heads of agreement legally binding?

Signed heads of agreement are only legally binding if it contains the key requirements of a contract. These are a clear offer, agreement (indicated by the signature) as to essential terms, consideration and a common intention to create a binding legal relationship with other contracting parties.

What is the difference between a heads of agreement and a memorandum of understanding?

A heads of agreement and a memorandum of understanding both refer to the same type of legal document.

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