Summary
Preliminary agreements are signed in the early stages of a transaction, often before detailed due diligence has been completed or definitive transaction agreements have been drafted.
Preliminary Agreements – When do Heads of Terms, Term Sheet, or a Memorandum of Understanding become a legal commitment?
Preliminary agreements are signed in the early stages of a transaction, often before detailed due diligence has been completed or definitive transaction agreements have been drafted.
These agreements allow parties to outline key terms and intentions whilst the specific details of the transaction are still under consideration and as a result are frequently viewed as essential stepping stones in the transaction process.
However, because preliminary agreements are typically entered into before the parties can fully anticipate the issues which may arise during the course of a transaction, careful attention must be paid to the possibility that such an agreement could be legally binding on the parties.
This article will explore the possibility that preliminary agreements can be legally binding and offers practical guidance for you to consider if you intend to enter into one.
Is Non-Reliance wording enough? – The High Court’s Decision in Hoffman&Greenbaum v Finalto Group Limited &Gopher Investments [2026]
One feature which often highlights the ‘preliminary’ nature of these agreements is the inclusion of non-reliance wording. Common phrases such as ‘subject to contract’ or ‘subject to a definitive agreement’ often signal that the signing parties should not be considered legally bound at this stage.
Recently, however, in Hoffman & Greenbaum v Finalto Group Limited & Gopher Investments, the High Court held that a preliminary agreement containing non-reliance wording was binding.
In Hoffman, the parties had agreed an equity term sheet (“ETS”) which outlined the commercial terms of the transaction. The definitive transaction documents which were to follow this preliminary ETS, did not materialise.
The ETS in Hoffman contained wording to the effect that the agreement was legally binding on the parties, subject to a definitive agreement. The Defendant advanced the argument that this non-reliance wording meant that the term sheet became binding once a definitive agreement had been signed.
The judge, however, disagreed. In this case, the non-reliance wording in the ETS did not prevent it from being binding; rather, the preliminary agreement was considered legally binding until it was replaced by a definitive agreement.
Therefore, as the Defendant had instructed their lawyers to stop work, the Defendant was in repudiatory breach of the ETS, and the Claimants were entitled to claim damages.
Preliminary Agreements – why do they matter to you?
It’s easy to fall into the trap of assuming that preliminary agreements are never legally binding, or that inserting standard non-reliance wording at the top of the document will automatically prevent legal obligation. This is not the case. The parties’ intention for the agreement to be non-binding may not be enough if that intention is not clearly reflected in the content of the document.
The Hoffman judgment serves as a clear reminder that drafters must be intentionally careful with the wording used in preliminary agreements.
If you’re entering a preliminary agreement, it’s important to carefully review the legal effect clause, the non-reliance wording, and any mandatory language such as “shall” or “will” throughout the document.
It goes without saying that signing a legally binding agreement carries real consequences, particularly if you fail to meet your obligations.
Preliminary Agreements – key practical takeaways
- Check that the agreement you are entering reflects the parties’ intentions – ensure the preliminary agreement accurately captures what has been agreed.
- Be careful about including specific obligations – do not commit to anything you do not intend or are not ready to fulfil, particularly if the obligation involves payments or financial commitments.
- Non-reliance wording cannot do all the heavy lifting – legal enforceability can, in certain circumstances, run deeper than the presence of the phrase ‘subject to contract’.
- Get expert advice – involve legal specialists early to help you avoid drafting pitfalls that could have serious consequences.
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