7 top tips for creating effective HOTs that streamline contract negotiations

7 expert tips for creating effective HoTs

Heads of terms (HoTs) provide a clear, shared outline of the main points of an agreement before entering into the final contract. In this guide, we’ll explore 7 expert tips for creating effective HoTs, so you can set your agreements up for smooth sailing from day one.

Each section in the HoTs plays a unique role in capturing the purpose, structure, and boundaries of your intended agreement. Here are our top 7 tips for creating your own HoTs:

1. Clearly identify the parties

This section introduces the parties involved in the agreement that will eventually sign the service/transaction/collaboration contract. When identifying the parties, it's crucial to detail:

• Company names and registration numbers for each party.

• Contact details, including names, titles, and the key representatives for each party.

Precise identification of each party’s role ensures there’s no ambiguity about who is responsible for what. Imagine you think you're agreeing to terms with a global conglomerate, but the other party understands that the deal will be entered into by one of their subsidiaries with little to no credit history. Even if this isn’t a deal-breaker, it’s important to clarify exactly who will be entering into the contract. If you were to confirm the parties up front, you can factor in any additional costs, such as requiring parent company guarantee to ensure financial security in this case. For this reason, it's always best to clarify the parties details early to save time and money later.

2. Define the scope of the agreement

Outlining the purpose and status of your HoTs clarifies each party's intent when it comes to the project or transaction at hand. Provide a description and a clear overview of its scope. For instance:

• Project/transaction description: Briefly summarise the project’s goals and scope. This might include descriptions like “acquisition of [X] assets” or “supply of [Y] services” or "collaboration on the [Z] research project".

• Status of the document: Clearly indicate if the HoTs are legally binding or just a preliminary guide. Defining the status helps prevent future disputes over whether these terms hold legal weight. If you want to know more about the legal status of HoTs, read these FAQs.

3. Outline the key commercial terms

This section is often the core of the HoTs and should succinctly outline the key business arrangements, including anticipated timelines, obligations, and deliverables. Here are some key commercial terms that should be covered in your HoTs:

• Project overview: Include a concise description of the agreement and what each party seeks to achieve.

• Obligations of each party: Detail the specific duties, responsibilities, or deliverables for both parties. For instance, Party 1 may be responsible for supplying certain resources, while Party 2 provides payment or additional support.

• Legal documents to follow: Specify any additional agreements or contracts expected to formalise this arrangement, such as a Service Agreement or Share Purchase Agreement.

• Timeframes and deadlines: If applicable, set clear deadlines for completing specific actions or milestones. Timeframes give the agreement structure and help parties stay aligned on expectations.

Clearly defined commercial terms are essential for ensuring both parties understand the key aspects of the deal, minimising the risk of misunderstandings later on.

4. If you're sharing sensitive data, include confidentiality obligations

If you've found the perfect partner to do business with, and both sides are sharing sensitive business insights to secure the deal - you'll want to ensure that your confidential information is kept a secret. However, without any confidentiality terms in place, it would be difficult to prevent the other party from sharing, or potentially using this information if the deal doesn’t go through.

Including legally-binding confidentiality provisions in your HoTs protects your sensitive information, ensuring that any proprietary details shared during early-stage negotiations remain secure, regardless of the outcome.

If you will be including confidentiality provisions, don't forget the following details:

• Duration of confidentiality obligations: Decide if confidentiality should last indefinitely or for a set period after the agreement ends, such as two years.

• Scope of confidential information: Specify the types of information covered, such as customer lists, trade secrets, pricing, or intellectual property.

By including a confidentiality clause that is legally binding, you can prevent your confidential information being leaked before a more definitive contract is signed between the parties.

If you have not yet agreed on the key terms of a future agreement that may require HoTs, but will still be sharing confidential information during early-stage discussions, it’s important to have a non-disclosure agreement (NDA) in place to protect your confidential information. If one party is sharing sensitive information, then use this template. If both parties will be sharing, then use our mutual NDA template. You can find out more about confidentiality agreements by reading this guide.

5. Set clear exclusivity terms (if applicable)

Ever thought you were the only company invited to tender for a contract, only to discover you're actually one of several competitors battling it out for the same deal? To avoid unpleasant surprises - or worse, hearing "we've been in talks with someone else; can you price match?" - consider including a legally-binding exclusivity clause. This clause limits either party’s ability to negotiate similar agreements with third parties during a specified period. This is particularly useful for high-stakes or complex transactions where commitment from both parties essential.

Key points to cover in an exclusivity clause include:

• Exclusivity period: Define how long the exclusivity period will last, such as three months.

• Restriction on existing negotiations: Specify if the exclusivity applies retroactively, preventing either party from engaging with other potential partners or clients for the duration of this agreement.

• Legally binding status: State explicitly whether the exclusivity clause is legally binding to avoid any ambiguity. For instance, include language such as, "This clause is legally binding" to ensure clarity.

6. Address general terms

You can also add general terms to cover foundational legal aspects and reinforce the document’s intent. This might include details like which country’s laws will apply to the HoTs and where any disputes will be settled. This section could include:

• Binding nature of clauses: Indicate if any clause within the HoTs is legally enforceable, such as confidentiality or exclusivity clauses.

• Costs: Define who will bear the costs related to the preparation and performance of the HoTs - often, each party covers its own expenses.

• Rights of third parties: Make it clear that only the involved parties can enforce the legally-binding terms, preventing outsiders from intervening.

• Governing law and jurisdiction: Specify which country’s laws apply and which courts will have jurisdiction over disputes. For instance, the document may state that it’s governed by the laws of England and Wales.

7. Include any additional unique terms to the deal

Every business agreement is unique, and your HoTs should reflect this. To prevent a party saying in the future "Wait, I thought this deal would only go ahead on the basis that [X]" - include all of the agreed terms, even if they do not fall under the generic key terms included in HoTs.

Here are some additional considerations you may wish to include:

• Performance milestones or KPIs: Outline specific performance standards that should be met, particularly in long-term projects.

• Termination provisions: Set out the conditions under which the HoTs can be terminated, if termination can occur without a breach and the consequences of early termination.

• Amendments: State the process for modifying the document if necessary, ensuring that both parties consent to any changes.

Customising your HoTs ensures that it fully addresses the specific aspects of your transaction and helps to create a smoother path toward final contract negotiations.

Conclusion

Creating clear and thorough Heads of Terms is an essential part of preparing for successful contract negotiations. The precision and structure provided by crystal clear HoTs can significantly streamline the negotiation process, reducing the potential for misunderstandings and setting the foundation for a smoother working relationship. By including these key sections and incorporating these top tips, you’ll set up a solid foundation for formalising your agreement and managing expectations on both sides.

To help you get started, Docue offers a comprehensive HoTs template that incorporates all of the above-mentioned clauses, making it easier to formalise your agreements efficiently and effectively.

Ready to streamline your contract negotiations? Sign up today and use Docue's fully-customisable HoTs template!