Most business sales, joint ventures and large supply deals start with a short document. It may be called a letter of intent, heads of agreement, a term sheet or a memorandum of understanding. It records the price, the structure and the main conditions, and it gives both sides the confidence to spend money on due diligence and lawyers.
The question that causes the most trouble later is a simple one: is that document binding? Parties often assume it is not, then discover that some clauses do bind them. Others assume it locks the deal in, then find that the other side can walk away at any time without consequence.
A 2025 High Court judgment is a useful reminder of how much turns on the drafting. The court refused to interdict a seller who sold an asset to a third party during an agreed exclusivity period, because the letter of intent was, in law, only an agreement to agree.
The label does not decide the question
South African courts do not look at the heading of a document to decide whether it is a contract. They ask two questions.
- Did the parties intend to be bound? The court looks at the wording, the surrounding circumstances and how the parties behaved. Phrases such as “subject to contract”, “non-binding” or “subject to a definitive agreement” are strong signs that they did not.
- Have the essential terms been agreed? For a sale, that means at least the thing being sold and the price, or a method for working out the price that does not depend on a further agreement. If important terms are left open for later negotiation, there is usually no binding contract yet.
A heads of agreement that fixes the merx and the price, says it is binding and leaves only formalities for later may well be an enforceable sale. A letter of intent that records a price “subject to due diligence, board approval and agreement on the transaction documents” usually is not.
Agreements to agree and agreements to negotiate
Our law has long treated a bare agreement to agree as unenforceable. Each party keeps the freedom to decide whether to conclude the final contract, and a court cannot write the terms for them.
An agreement to negotiate is different. In Southernport Developments v Transnet (2005), the Supreme Court of Appeal held that an undertaking to negotiate in good faith can be enforced where the parties also agree a deadlock-breaking mechanism, such as referring unresolved terms to an arbitrator or expert. The mechanism gives the court an objective way to complete the bargain.
The Constitutional Court in Makate v Vodacom (2016) noted that whether a bare duty to negotiate in good faith is enforceable without such a mechanism remains an open question. Until that is settled, the safe assumption is that it is not.
The 2025 aircraft case
In Hennie’s Sports Bar (Pty) Ltd v Ryall Trading CC [2025] ZAGPPHC 695, the parties signed a letter of intent in which the seller undertook to negotiate the sale of an aircraft in good faith and exclusively with the prospective buyer. Before the exclusivity period ended, the seller sold the aircraft to someone else.
The buyer applied urgently for an interdict. The Gauteng Division, Pretoria dismissed the application with costs. Because the letter contained no deadlock-breaking mechanism, the court classified it as an agreement to agree and found that the buyer had not shown the right it needed to support an interdict.
The lesson is practical. If exclusivity matters to you, a sentence promising exclusivity is not enough. The document needs to make that clause expressly binding, say what happens on breach and, ideally, give you a remedy that does not depend on proving the whole deal was concluded.
Clauses that should usually be binding
Even where the commercial terms are non-binding, most well-drafted letters of intent make certain clauses binding from signature. These typically include:
- Confidentiality: protecting information shared during due diligence, often with a separate non-disclosure agreement.
- Exclusivity or a “no-shop” undertaking: for a fixed period, with a clear start and end date.
- Costs: each party pays its own costs, or a break fee applies in specified circumstances.
- Access for due diligence: what the seller must make available, and when.
- Conduct of business: an undertaking by the seller to run the business in the ordinary course until signature.
- Governing law, jurisdiction and dispute resolution.
- Termination: when the letter falls away, for example on a long-stop date.
The document should state plainly which clauses are binding and which are not. A general statement that “this letter is not binding” can undermine the confidentiality and exclusivity clauses you actually wanted to enforce.
Other risks to watch
Accidentally concluding the deal. If the letter records all the essential terms and says nothing about being non-binding, a court may find that a binding sale has already been concluded, and that the “formal agreement” was merely meant to record it.
Competition law. Where the transaction is a notifiable merger under the Competition Act 89 of 1998, the parties may not implement it before approval. A letter of intent that gives the buyer control over the target’s business decisions before approval can create gun-jumping risk.
Employees and third parties. Announcing a deal too early can unsettle staff, customers and lenders. Confidentiality clauses should cover who may be told, and when.
Conduct during negotiations. Misrepresentations made to induce a party to sign can found a claim even if the main deal never closes. Keep correspondence accurate.
A practical checklist before you sign
- Decide what you want: a non-binding record of intent, a binding sale with conditions, or something in between.
- Say expressly which clauses are binding and which are not, clause by clause.
- If the commercial terms are meant to bind, make sure the essential terms are fixed or objectively determinable.
- If you need exclusivity, make it binding, set a clear period and consider a break fee or other agreed remedy.
- If you want the duty to negotiate to be enforceable, include a deadlock-breaking mechanism, such as referral to an expert or arbitrator.
- Include a long-stop date, so the document does not linger indefinitely.
- Check for competition, regulatory and third-party consent requirements before the parties start acting as if the deal is done.
- Have the letter reviewed by your lawyer before signature, not after a dispute arises.
How O’Reilly Law can help
We draft and negotiate letters of intent, heads of agreement and term sheets for business sales, share acquisitions, joint ventures and commercial transactions. We advise on which terms should bind, structure exclusivity and break-fee provisions, and carry the agreed terms through due diligence into the final transaction documents. Where a preliminary agreement has already led to a dispute, we assess the parties’ rights and remedies.
Contact us before you sign a letter of intent, so that the clauses you rely on will actually hold.
Related reading: Term sheets in M&A: why early legal input shapes the outcome of your deal · Legal due diligence when buying a business in South Africa
This article is general information and not legal advice. Correct as at November 2026.