United Arab Emirates: Heads Of Terms

Last Updated: 17 November 2017
Article by STA Law Firm
Most Read Contributor in United Arab Emirates, November 2017

Intention is one of the most powerful forces there is. What you mean when you do a thing will always determine the outcome. The law creates the world." - {C}{C}Brenna Yovanoff


Every contract is the result of an intense negotiation between the parties of the contract to settle the terms. Stemming from an oral discussion, these terms get translated onto paper and are signed by each party to record the conclusion of negotiation for the use of creating the final contract. These written provisions are called the "heads of terms." Corporate commercial transactions often begin with parties executing them. They are the first documents following non-disclosure agreements. Some of these documents are a term sheet, a Memorandum of Understanding (MOU), or a letter of intent (LOI). They predate the official final contract of a proposed transaction and are used mostly in corporate transactions: share acquisitions, loan finance, joint ventures, project financing, private equity investments, and more.

Since they have no legal effect on each party, the UAE Courts consider heads of terms to be non-binding. The Dubai Court of Appeal states in one of their adjudicated cases that "pre-contractual negotiations are formalities with no legal effect, [because they are] preparations in anticipation of a final contract that is yet to be concluded."

One may assume that parties will not be liable if no final agreement is ultimately reached based on the respective heads of terms. This assumption, however, is incorrect. It depends on the language used mostly. Article 257 of the UAE Civil Codei states that "the basic principles in contracts are the consent of the contracting party(ies) and the obligation(s) they have agreed to as set out in the contract." In the infamous case of National Bank of Umm Al Quwain (the Bank) v. Global Investment House ii, the Dubai Courts reviewed this matter. Clause 3 of the MOU stated that the Bank and the Global Investment House (the GIH) should conclude a subscription agreement only once the Bank completes all formalities and legal matters preceding that agreement. The Court of Appeal stated that "if the wording of a contract is clear, the courts should not depart from it by way of interpretation to ascertain the intention of the parties. It is important that the negotiations produce an agreement containing the essential terms of the contract." Consequently, the Court upheld the MOU to be binding, stating that Clause 3 of the MOU contain a clear wording of the parties' intention and agreement and that they should not depart from it.

Thus, even if heads of terms are non-binding, they often do contain legally binding provisions that are necessary for the protection of parties. The governing law, jurisdiction clauses, and confidentiality clauses still may bind parties. In a term sheet agreement, for example, a borrower will want the lender to give a binding confidentiality undertaking in respect of confidential information that the borrower provides in negotiations. In the UAE, confidentiality and exclusivity provisions are valid and enforceable only if they are clearly drafted and defined. If you breach a confidentiality undertaking, you will be liable for damages.  

Good Faith

UAE law also attributes great importance to the concept of good faith and the obligation of the parties to perform their contractual obligations in good faith.iii The existence of heads of terms gives rise to this responsibility. Depending on the provisions of these heads of terms, one may be under an obligation to keep the other party informed, cooperate with the other party in entering into a final contract, and not walk away from negotiations without good cause. Breach of the obligation to negotiate in good faith may result in payment of damages for loss suffered by the injured party and any expenses that they may have incurred in carrying on the negotiations.

The Use of 'Subject to Contract'

So how do we know whether the heads of terms are legally binding on the parties? It depends on all the facts of the matter and the conduct of the parties: whether we acted upon those heads of terms, how we drafted the provisions and the likes. In a recent UK case of RTS Flexible Systems v Molkerei Alois Muller GmbH, the Letter Of Intent contained no express indication of whether its terms were intended to be binding. However, it still amounted to a legally binding contract. The court held that "the comprehensive terms and the language used in the letter of intent meant that it was certain and complete to have contractual force." This Letter of Intent had contained the term "subject to contract," meaning that the Letter of Intent was intended to have been subject to a final, binding contract. The use of this phrase should create a strong presumption that parties involved in such a commercial transaction will not be bound to the LOI.iv However, if one begins to perform the contract as envisaged by the heads of terms, the words "subject to contract" might not be as effective as expected, as evidenced by this case. It is therefore preferable for heads of terms to spell out the parties' intention. For example, the parties may state that 'these heads of terms are not legally binding between the parties except by the provisions specifically set out in this document'; thereby, clearly stating the lack of intent of being bound to the heads of terms.

Advantages and Disadvantages of Heads of Terms


  1. Although heads of terms are not binding, one may find it difficult to maneuver a transaction if something emerges during the negotiations that had not been taken into consideration previously.
  2. One may find themselves legally bound by its terms even if the parties did not have that intention.
  3. Time spent arguing over the heads of terms could have been spent negotiating a definitive agreement.
  4. Heads of terms will create a strong moral commitment to observe the terms agreed. Depending on the circumstances, this can be considered as an advantage or a disadvantage of heads of terms.

However, despite the fact that heads of terms are risky, they are helpful in many ways in corporate and commercial transactions. Some of those advantages are outlined below because of heads of terms:


  1. Provides a framework to negotiate a final contract.
  2. Initiates a moral commitment on both the parties to observe the terms agreed.
  3. Provides a useful statement of major terms of the proposed deal.
  4. Helps in setting out the timetable and obligations of both parties.
  5. Increases efficiency.

Some Guidelines for Drafting Heads of Terms

It should always be decided from the outset whether such a preliminary document should be made binding or nonbinding. If one wishes to be bound by it, it should be stated. However, if one does not desire to be bound, this may be expressly stated by using such wording as "subject to contract" or using language similar to the following:

'The parties agree that this MOU/term sheet does not constitute a binding commitment by either party on any transaction (except the confidentiality and exclusivity sections set forth above).'

However, one should bear in mind that the use of a precise wording or language may not alone be sufficient. One must always be careful with communication, actions, and conduct. As a general rule, one should confine the heads of terms to discussing the commercial deal only.


It is important to highlight that, before drafting heads of terms, one must have a clear understanding of what the parties wish to achieve. One should always consider issues that can be settled at the outset and which can be left on the detailed, definitive contract. If negotiations over the heads of terms stalled because of some unnecessary detail, this will delay preparation of the final agreement and increase the length and cost of the negotiations. Always remember that heads of terms can help in both defining the destination and planning a route. They should, therefore, be approached practically to avoid delay or progress in the wrong direction. 


i  Federal Law Number 5 of 1987 (as amended)

ii  As decided on 21 May 2012

iii  Article 246 of the Civil Code

iv  Prudential Holborn Ltd v Fraser Williams 1993

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions