Preliminary Document of Intent

February 1, 2007 8:39 am Published by

Knocking heads together

Sometimes, when a transaction is urgent or when there are still areas of uncertainty involved, it may be useful for business people to meet, negotiate and sign a preliminary document of intent, before the proper legal paperwork is put in place.    Motorway service stations seem to be a favourite venue for these events.

The resulting signed list of bullet points are called “Heads of Terms”, “Letters of Intent” or something similar and may provide a useful structure in which to pin down the main contract terms and flush out the significant issues. They can be a practical way forward, but caution does need to be taken and you will need to:

  • Decide what elements, in the heads, if any, are to be legally binding from the outset..  Relying on a blanket “Subject to Contract” may not be appropriate.

  • Realise that even non-legally binding parts are a moral commitment and will be difficult to re-negotiate, particularly if the parties have already started to perform them.

  • Define how long the agreement is to run, where, say, interim steps need to be taken and when and how it can be terminated.

  • Flesh out the details of the deal insofar as this is possible; who does what, where and how.  It is always better to avoid a commitment to “agree to agree” unresolved issues in the future but if one does, there is an implied duty to negotiate those outstanding points in good faith.

  • Include any exclusivity arrangements, cost issues or confidentiality clauses, and make it clear that these will remain legally enforceable in any event.

Any important commercial deal should be eventually translated into comprehensive legal documentation, but the wording of the preliminary paperwork may be key to the final outcome of the legal process; if at all possible, a copy of the heads should be passed by your solicitor before you sign up.

Andrew Fleming

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This post was written by Andrew