Heads of Agreement

Last reviewed and updated: May 2026

What Is a Heads of Agreement?

On 9 May 2013, Sackar J of the New South Wales Supreme Court restated the principles relating to when Heads of Agreement (HOA) will be found to be legally enforceable and binding. In the case before him, Sackar J found the HOA was legally enforceable because:

• The document was described as a “Heads of Agreement” — itself an indication the parties purported to enter into an agreement
• It was drafted under the supervision of legal practitioners following lengthy negotiations
• The specificity of the language suggested the parties intended to be bound
• The contemplation that further documents would be necessary did not detract from the immediately binding effect
• Various factual disputes about the underlying business did not go to the existence of the contract
• The plaintiff’s emotional condition at the time of execution did not vitiate the contract

Sackar J also emphasised the importance of courts considering the full background and context within which a written agreement was reached.

Background to That Case

• Proceedings were on foot and referred to mediation. At the conclusion of mediation, the parties executed Heads of Agreement.
• Correspondence exchanged over the following months supported the fact that a settlement had been reached and that there was no dispute about the HOA’s terms.
• The plaintiff’s reluctance to settle arose after inspecting property not in the condition expected — but that condition was not part of the HOA. The plaintiff then offered to pay less, which the other side rejected.
• The plaintiff ultimately sought to set aside the HOA, arguing it was not binding. The Court disagreed.

Heads of Agreement vs Binding Contract: What’s the Difference?

A Heads of Agreement is a document that records the key terms of a proposed transaction or settlement. Depending on how it is drafted, it may be:

• Immediately binding in its entirety (as in the case above)
• Partially binding — some terms binding (e.g., exclusivity, confidentiality, costs), others not (e.g., the core commercial terms, subject to formal contract)
• Not binding at all — an expression of intent only, with the clear intention that neither party is bound until a formal contract is executed

The critical distinction — and one that trips up many business owners — is that the label on the document is not determinative. Courts look at the substance and intent of the document, not its title. A document called “Heads of Agreement” may be binding. A document called “Letter of Intent” may also be binding. The language and context are what matter.

When Are Heads of Agreement Legally Binding?

Australian courts apply the test from Masters v Cameron (1954) 91 CLR 353, which identifies four categories of preliminary agreements:

1. Immediately binding: The parties intend to be immediately bound and also intend to make a formal contract — the formal contract is just a more detailed expression of the same terms. The HOA is enforceable from the moment it is signed.
2. Binding, subject to condition: The parties are bound immediately, but performance is conditional on execution of a formal contract. The absence of a formal contract may discharge the binding obligation.
3. Not binding until formal contract: The parties do not intend to be bound until a formal contract is executed. No binding agreement exists at all until that point.
4. Immediately binding with full terms: The parties bind themselves to all terms immediately, and the subsequent formal contract adds nothing material. The HOA is fully enforceable as it stands.

Where a HOA falls in this spectrum depends on the specific language used, the surrounding circumstances, the conduct of the parties after signing, and whether there were still material terms to be agreed.

Key Clauses in a Heads of Agreement

Even where a HOA is expressed to be “subject to contract” (and therefore not immediately binding on the core commercial terms), certain clauses are routinely made immediately binding. These include:

• Exclusivity clause: The seller agrees not to negotiate with other parties for a specified period, giving the buyer time to conduct due diligence and negotiate the formal contract. Breach of an exclusivity clause can found a damages claim even if the main transaction never completes.
• Confidentiality clause: The parties agree to keep confidential the existence of the negotiations and any information exchanged during due diligence. This is almost always made binding immediately.
• No-shop clause: The seller agrees not to solicit other offers during the exclusivity period. Similar to an exclusivity clause but focuses on the seller’s conduct.
• Costs clause: Who bears the costs of the transaction (legal, accounting, due diligence) if the formal contract is not completed. Often disputed.
• Break fee: A specified amount payable if a party walks away from the transaction, designed to compensate the other party for wasted transaction costs.

Including these clauses in a HOA — and clearly stating they are binding — provides meaningful protection during the pre-contract period.

Differences Between HOAs, Term Sheets, and MOUs

These documents serve similar functions but have nuances in how they are used:

• Heads of Agreement (HOA): Most commonly used in M&A transactions, business sales, commercial settlements, and joint ventures. Often contains a mix of binding and non-binding provisions. The term is used widely in Australian and English-influenced commercial practice.
• Term Sheet: Common in investment and lending transactions (venture capital, private equity, debt finance). Similar structure to a HOA — outlines key economic terms and conditions, typically “subject to” formal documentation. Often explicitly non-binding except for specific provisions.
• Memorandum of Understanding (MOU): Common in government, institutional, and international commercial contexts. Often deliberately non-binding — a statement of intent rather than a commitment. However, as with all these documents, the language controls — an MOU with binding language is binding.

The practical message: do not assume any of these documents is automatically non-binding. Have a lawyer review them before you sign.

Risks of Signing a HOA Without Legal Advice

Business owners frequently sign HOAs under time pressure — at the end of a negotiation meeting, at mediation, or to “lock in” a deal quickly. The risks of doing so without legal advice include:

• Unintended binding commitment: You may believe you are signing a non-binding outline of heads of terms, only to find out — when the other side files proceedings to enforce it — that it was immediately binding on all its terms.
• Locked-in commercial terms: Once you have signed a HOA with binding core terms, negotiating changes to those terms in the formal contract is very difficult. The HOA effectively fixes the commercial deal.
• Binding exclusivity without protection: An exclusivity clause commits you to dealing only with one party while preventing you from exploring better alternatives. If the transaction falls over, you may have lost weeks or months and faced significant opportunity cost.
• Missing material protections: A HOA that fails to include appropriate conditions (subject to due diligence, subject to finance, subject to regulatory approval) may bind you to a transaction you later discover is unsuitable or unfinanceable.

How Courts Interpret Heads of Agreement

Australian courts approach the interpretation of HOAs using the same principles that apply to commercial contracts generally:

• The objective test — what a reasonable person in the parties’ position would understand the words to mean, having regard to the whole document and the surrounding circumstances known to both parties at the time of signing.
• The words are given their natural and ordinary meaning in their commercial context.
• Post-execution conduct is admissible as evidence of what the parties understood the agreement to mean (though courts are cautious about over-relying on it).
• If the document is genuinely ambiguous, the court may look at the negotiations preceding execution to understand the parties’ intent.

Courts will generally try to give effect to commercial documents, particularly where parties have conducted themselves as if bound. Attempting to walk away from a HOA that has been partly performed — or where the other side has incurred significant costs in reliance — is legally risky.

Drafting Tips for Business Owners

Whether you are buying or selling a business, entering a joint venture, or settling commercial litigation, follow these principles when dealing with a HOA:

1. Engage a lawyer before signing. Even a short review — a few hours’ work — can prevent an expensive dispute later.
2. Be explicit about binding vs non-binding provisions. If you intend some terms to be binding (exclusivity, confidentiality) and others not (core commercial terms, subject to formal contract), say so clearly in the document itself.
3. Include conditions. “Subject to satisfactory due diligence”, “subject to board approval”, “subject to execution of a formal contract” — these conditions protect you from being immediately bound to terms you have not yet fully validated.
4. Fix a deadline. Exclusivity periods, conditions, and the obligation to negotiate the formal contract should all have specific deadlines. Open-ended obligations are difficult to enforce and create ongoing uncertainty.
5. Govern the document. Specify Queensland or Australian law as governing law. Include a dispute resolution clause — whether arbitration, mediation, or litigation.

Queensland and Federal Law Treatment

In Queensland, HOAs and preliminary agreements are interpreted using the same principles of contract law that apply across Australia — primarily derived from common law and equity. The Property Law Act 1974 (Qld) has limited direct application to HOAs, though it is relevant where the HOA involves an interest in land and is required to be in writing and signed.

Under the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)), a party who makes false representations during negotiations leading to a HOA — or who engages in misleading or deceptive conduct — may face both ACL liability and contract challenges (s 18 ACL, s 4 Australian Consumer Law). This is an important overlay on every commercial negotiation in Australia.

Frequently Asked Questions

I signed a Heads of Agreement at mediation. Is it enforceable?

Almost certainly yes, if it is signed by both parties and contains clear commercial terms. HOAs signed at the conclusion of mediation are regularly enforced by courts — this is exactly the scenario that arose in the NSW Supreme Court case discussed above. Courts are particularly reluctant to allow a party to resile from an agreement reached after lengthy, assisted negotiation. If you are having second thoughts after signing, seek urgent legal advice.

Can I include a “subject to contract” clause to protect myself?

Yes — a clearly expressed “subject to contract” or “subject to execution of a formal agreement” clause will generally prevent the HOA from being immediately binding on the core commercial terms. However, specific clauses (exclusivity, confidentiality) are often still made binding. And the “subject to contract” formula does not protect you from ACL claims if you engaged in misleading conduct during negotiations. Use it, but understand its limits.

What happens if the other party breaches an exclusivity clause in our HOA?

If the exclusivity clause is binding (as it should be, even in a “subject to contract” HOA), breach entitles you to sue for damages — typically your wasted costs and potentially the loss of the transaction opportunity. Injunctive relief (an order stopping the other party from dealing with a third party) may also be available if you act quickly enough. Time is critical.

Is a Heads of Agreement the same as a contract?

Not always — but it can be. Whether a HOA is a binding contract depends on whether it satisfies the essential requirements of a contract: offer, acceptance, consideration, certainty of terms, and intention to be legally bound. A HOA that is clearly expressed to be immediately binding on all its terms, with sufficient certainty, is a contract. A HOA that is expressed to be “subject to contract” on its core terms is not a contract for those core terms — though it may be a contract for its specific binding provisions.

How Boss Lawyers Can Help

Whether you are negotiating a HOA, have signed one and are unsure of your position, or are facing a dispute about whether a HOA is binding, experienced commercial advice is essential. We regularly act for business owners, buyers and sellers in commercial transactions and disputes involving HOAs, term sheets, and MOUs — from initial drafting through to contested enforcement proceedings.

Contact Mark Harley at Boss Lawyers on 1300 267 711 or visit bosslawyers.com.au.

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This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.