When is a “Heads of Agreement” signed at mediation legally binding?

It is not uncommon for disputing parties to explore mediation or other forms of alternative dispute resolution in an attempt to settle matters out of court. However, is a “Heads of Agreement” (HOA) signed by the parties during mediation legally enforceable?

This was the issue considered by Hong Kong District Court in Ip Patrick v Chan Meanne Ching Man [2025] HKDC 1578.

Facts

The parties were colleagues at a Hong Kong tertiary institution who were involved in an office romance that had broken down. The defendant complained to the employer that the plaintiff had sexually assaulted and harassed her.

The parties attempted mediation and with the help of a mediator signed the HOA.

Clause 1 of the HOA provided that:

“The Parties wish to record in this Heads of Agreement the terms on which they have resolved their dispute. The Mediator will prepare a mediation agreement on these terms for the Parties to review and sign (the “Mediation Agreement”). The Parties agree that they have reached a full and final settlement of all claims against each other on the basis of the agreement set out below”.

The defendant later refused to sign the Mediation Agreement. Consequently, the plaintiff sued the defendant seeking specific performance of the HOA.

The defendant argued that the HOA was not legally enforceable and counterclaimed for loss arising from the damage she suffered as a result of the plaintiff’s harassment (counterclaim). However, the defendant failed to appear at trial.

The decision

The primary issue was whether the HOA was a legally enforceable agreement or whether it was merely an “agreement to agree” pending the execution of the Mediation Agreement.

The District Court set out the following key legal principles:

1. Whether a binding contract exists does not depend on the parties’ subjective intentions, but on what was communicated between them by words or conduct, and whether this objectively shows that the parties intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for forming legally binding relations.

2. Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation will be dealt with by a formal contract, the agreement may belong to the following three categories:

• • Category 1: The parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect
  • Category 2: The parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document
  • Category 3: The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract

Both Category 1 and Category 2 will give rise to a legally binding contract (but not Category 3).

The court applied the above legal principles and held that the HOA fell within Category 1, in particular noting:

1. The HOA confirmed that the parties “have reached a full and final settlement of all claims against each other”. This carried with it a consensus of finality, demonstrating an immediate intention to be bound.
2. The Mediation Agreement was envisaged to be prepared on the terms of the HOA. This indicates that the Mediation Agreement should embody the terms already agreed in the HOA.

The District Court ultimately found for the plaintiff and ordered specific performance of the substantive obligations set out in the HOA.

As the defendant (and her witnesses) did not attend trial, the counterclaim was also dismissed.

Key takeaways for employers

When negotiating settlement terms at mediation, employers should aim to finalise and sign the terms of any settlement reached at mediation to reduce the chances of further dispute or negotiation.

The risk of this would be high given the fact the parties are attending mediation!  Therefore, any “Heads of Agreement” should be avoided.

However, if an “agreement to agreement” is unavoidable, employers should ensure all the key obligations are included – and the “agreement” clearly states that the parties’ intention is (a) not to create a binding contract, and (b) to prepare and sign a more detailed formal contract (falling within Category 3).

The judgment in this case is available at link.