In Part 2 of The Anatomy of the Deal, we look at what Heads of Terms commit the parties to, whether a promise to negotiate in “good faith” is worth anything under English law, and what stops a party walking away
Partly, by design. The commercial heart of the deal – price, structure and mechanics – is typically expressed as ‘subject to contract’ and is non-binding. However, specific clauses are usually carved out and made binding immediately: exclusivity, confidentiality, cost allocation, and governing law and jurisdiction. One word of warning, though: adding ‘subject to contract’ is not a force field. If the parties behave as though the deal is done, and carry out the contract on the agreed terms, a court can find a binding agreement based on their conduct, even if there is no signed document.
Generally, no. The reasons go deeper than drafting technique. A bare agreement to negotiate in good faith is unenforceable; each side is free to walk away from negotiations at any time, for any reason, so there is no objective way for a court to judge whether they have done so in ‘good faith’. Unlike many European legal systems, English law has no general, standalone duty of good faith to fall back on.
Not quite; it is fact-sensitive. Where an obligation to negotiate in good faith is tied to specific, objective criteria or a defined process for resolving disagreement, rather than being a bare promise to agree on everything, courts have sometimes been willing to give it real effect. Without that anchor, the default rule against enforceability applies.
That is different. A promise not to negotiate with anyone else (a ‘lock-out’) can be binding, provided it runs for a fixed period and something is given in return. A promise to keep negotiating will not be binding. Subject to the nature of the deal, we would expect an exclusivity period of 60-90 days.
Because it is standard market practice. Heads of Terms typically include language obliging the parties to negotiate towards a definitive agreement, often coupled with a good faith qualifier. This signals commitment and can shape how the rest of the document is read, even though it is unlikely, on its own, to give either side a legal remedy if talks collapse.
Contractually defined consequences, not vague good faith language. Well-drafted Heads of Terms build in a clear trigger: pull out for anything other than specified reasons (such as a material adverse change or a significant due diligence finding) and you cover the other side’s costs, usually up to a cap. The key is to define those reasons objectively; ‘without a legitimate reason’ simply recreates the good faith problem. Beyond the document itself, wasted costs, reputational damage in a small market, and deal fatigue can also be deterrents. We typically see a very high conversion rate from deals where Heads of Terms have been signed to deals being completed.
Good-faith language may signal an intention to progress a transaction, but it is not a substitute for clearly defined obligations. The legal position and the commercial realities of a deal need to be considered together.
For founders and shareholders, the practical lesson is to establish which provisions are intended to be binding, clarify the process and expectations for the next stage, and consider the consequences if negotiations do not proceed as planned.
Addressing these questions early can help both parties approach the transaction with a clearer understanding of their commitments and the decisions that lie ahead.
