Heads of Terms: Enforceable or Not?

Every now and then we will have a commercial client ask us whether they can do something about the failure of a party in a transaction to implement agreed Heads of Terms. The answer in all honesty is usually no. Heads of Terms are usually, but not always, the main parts of a deal agreed, principal to principal, or agent to agent, before being passed to lawyers for proper binding documentation. Typically, but not exclusively, in Scotland, Heads of Terms will, even if signed, have a clause indicating that it is not intended that the document forms part of legally binding contract and is subject to a binding agreement.

The law is reasonably settled in Scotland that a claim for breach of contract will not normally arise if heads are not proceeded with. However, the recent decision of Lord Bannatyne in the case of Landvest PCC Limited v The Trustees of the Archdiocese of St Andrews in Edinburgh contains an interesting analysis of a slightly different argument.

In this case the selling agents of the Archdiocese were selling a former school. There seems to have been protracted correspondence over terms until eventually Heads of Terms were agreed. The Heads of Terms had the usual disclaimer that they were not to form part of a legally binding contract. They also included an agreement to provide an exclusivity period for the purchasers to be allowed to negotiate a final contract.

It was argued for the purchasers that the exclusivity provision mounted to a promissory obligation under Scots law and therefore the trustees were obliged to give the purchaser exclusivity for that period. The defenders disagreed arguing that the Heads of Terms were non-binding. Lord Bannatyne agreed with the trustees. Not only did he agree with the trustees that the Heads of Terms did make commercial sense, he held that the clause indicating it was not intended to be contractual, would be deprived of its natural meaning, if he did hold that some kind of unilateral obligation was being imposed. He held therefore that exclusivity period was part of the terms to be agreed, and was subject to the final agreement.

There are probably practical lessons in terms of being precise in exactly what is intended in Heads of Terms. It also remains to be seen if the case is reclaimed (appealed) to the Inner House of the Court of Session. For the time being, however, it appears that the courts will continue to hold that Heads of Terms explicitly stated to be non-contractual and conditional on the final agreement, will be held as such.

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Eric Baijal is head of litigation at BBM Solicitors. To contact Eric or one of our team, get in touch via our online contact form.