Background to pre-contractual obligations

Introduction

In the early stages of potential transactions, parties frequently enter into pre-contractual agreements such as Heads of Agreement and confidentiality and exclusivity agreements. These may be set out in a series of separate agreements, or they may be incorporated into one document.

Although there is no prescribed form for a Heads of Agreement or similar document (eg Memorandum of Understanding, Heads of Terms, Letter of Intent, Term Sheet), it will typically set out the main terms agreed in principle between the parties, outline the timetable, obligations of the parties during negotiations and the negotiation process.

A Heads of Agreement or similar document may be legally binding and care must be taken to ensure that a legally binding commitment is not created unintentionally, or that parties do not enter into a non legally binding commitment, believing it to be binding.

An exclusivity agreement is frequently entered into by parties at the outset of negotiations, in order to give one party exclusive negotiating rights. An exclusivity undertaking is usually expressed in negative terms, ie an obligation not to negotiate with other parties for a period (known as a "lock out"). This is because a positive obligation to negotiate (a "lock in") is not enforceable in a number of jurisdictions. In general, there is also a requirement that the exclusivity period should be of a limited duration, in order to prevent it being unenforceable.

It is also usual for the parties to enter into confidentiality undertakings. It is preferable for these to be entered into early in the negotiation process, prior to any confidential information actually being exchanged. In some jurisdictions this is not necessary as a good faith obligation imposes a duty of confidentiality on parties in negotiations.

Most of the European jurisdictions discussed (other than the UK) impose a duty to negotiate in good faith and this may include a duty not to break off negotiations without reasonable cause.

This microsite considers the following issues concerning pre contractual obligations in the relevant jurisdiction:

Pre-contractual negotiations

  • Is there an implied duty of good faith to continue to negotiate?
  • What are the consequences of termination of negotiations by one party unilaterally?
  • What is the potential impact on third party rights?

Confidentiality agreements

  • Is there an implied duty of confidentiality?
  • What are the consequences of breach?
  • Are specific terms/formalities required for a binding confidentiality agreement?

Exclusivity arrangements

  • Can an obligation to negotiate exclusively be implied?
  • Are any specific terms/formalities required to make exclusivity arrangements enforceable?

Heads of agreement

  • Are they legally binding?
  • Are any specific terms/formalities required to make them legally binding?
  • What are the consequences of breach?
  • Can heads of agreement have any tax implications?

Break fees

  • Are break fees usually payable?
  • What are the main legal issues to be considered, eg enforceability?

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.