Can you rely on heads of terms?

If you don’t have a signed contract, you are creating trouble for yourself. To prove your rights and remedies, you will need to overcome various evidential hurdles to prove the 5 requirements for a contract.

What happens when your carefully crafted contract is lost from a computer late at night, but replaced by rapidly hand-written ‘heads of terms’… particularly when one party tries to reverse out of the deal? This is what happened to the Abberley family agreeing how to divide the family farm.

Whether there is a binding contract between the parties… depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.

RTS Ltd v Molkerei Alois Muller Gmbh

The question was whether the heads of terms were binding. And the court analysed it as follows:

  1. Objectively: what did words and conduct of the parties suggest was intended? It is irrelevant what the parties believed (subjective)
  2. Purposively: what was the reason for the heads of terms – was it binding until superseded or never binding?
  3. Looking for Certainty: did the heads of terms include all essential terms? Difficulty in interpreting the contract is not the same as ambiguity and uncertainty. If the brief terms are definite then there is certainty.
  4. Formality: the mere absence of a signed document or the fact that the parties envisaged a more formal document does not mean there is no contract.

What should you do?

If you only want to work with another company once a signed agreement is in place then communication should be marked subject to contract.

It is best practice to agree, record, sign and only then start.

Abberley & Ors v Abberley [2019] EWHC 1564

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