Commercial Update 83 – Heads of Terms – When Are They Actually Enforceable?

You may be aware of or have used Heads of Terms (sometimes called Heads of Agreement) during negotiations. While these are useful in nailing down the key parts of a deal, disputes can arise over whether they are legally binding or intended to be so.

In the recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd, the key question of whether there was the necessary intention to create legal relations fell to be decided by the court. The court when looking at the facts, laid out the relevance of contractual intention and contractual certainty in deciding whether a binding contract exists, which meant looking at the whole set of negotiations (or course of dealing) between both parties. The court noted that:

  • The burden of demonstrating that there was a lack of intention to create legal relations lies on the party asserting I;
  • There can be a binding contract even in circumstances where there are further terms to be agreed.

The Court held that in this case, the Heads of Terms were not binding citing:

  • The drafting, which demonstrated that the intention of the parties was not to create a binding obligation;
  • The essential terms of the lease had not been agreed by the parties; and

However a specific time-limited arrangement in the Heads of Terms was on the facts held to be legally binding.

So, what to make of the above?

Well, the key takeaway here has to be that calling a document heads of terms is not conclusive as to whether a document is intended to be legally binding or not.

The decision highlights the importance of clear drafting to accurately reflect the intentions of the parties and ensure there is sufficient certainty of terms.

Regards to all


Roger Margand