Beyond the Handshake: Mastering Pre-Contract Agreements

The most critical terms of a deal often aren’t decided at the signature line; they’re set weeks earlier in the “pre-contract” phase. A pre-contract agreement is a preliminary document outlining the key terms before the final contract is signed. These documents, like Letters of Intent (LOIs), Memorandums of Understanding (MOUs), or Term Sheets, act as roadmaps for negotiation. They may carry hidden legal risks if drafted poorly, potentially becoming binding when you don’t need them.

The average purchase completion rarely takes less than three months, often stretching to 6-12 months. During this extended period, suboptimal contract terms and ineffective management can trigger value erosion.

The question isn’t whether you need pre-contract agreements. It’s whether you’re managing them correctly. Let’s find out. 

What counts as a pre-contract agreement?

Pre-contract agreements come in several flavors, each serving a specific purpose in the deal-making process:

1. Letter of Intent (LOI): LOIs are common in mergers and acquisitions and large commercial deals. They outline the buyer’s serious interest and key commercial terms while negotiations continue. Understanding how to write a contract starts with mastering these preliminary documents.
2. Memorandum of Understanding (MOU): Often used in partnerships or joint ventures, MOUs establish the framework for collaboration. They’re typically less formal than LOIs but signal mutual commitment to move forward.
3. Heads of Terms / Term Sheets: These are bulleted lists of agreed commercial points, think pricing, payment terms, delivery schedules, and key obligations. They’re the skeleton that the final contract will flesh out.

The goal of these documents is to establish trust and create a framework without finalizing every legal detail. They allow parties to align on the big picture before investing significant time and money into contract drafting.

Organizations that embrace “contracting for performance” empower their teams to clearly define priorities and performance targets upfront. By involving all relevant parties at the beginning, companies can start with a comprehensive view of the total cost of ownership and value creation. Contract negotiations can then begin by creating a shared vision or statement of intent. A north star that keeps everyone aligned on integrative issues throughout the process.

Integrative issues are opportunities to expand value for both sides or areas where interests naturally align. For example, contract length typically costs the buyer nothing if properly structured, yet adds tremendous value for suppliers who gain long-term security.

Creating a roadmap for success

It’s recommended that parties create an informal document, similar to heads of terms or terms of engagement, that serves as both a contracting roadmap and governance guide. Without agreement on the specific characteristics of the relationship from the very start, the relational contracting process becomes less efficient and faces a higher likelihood of failure due to mismatched expectations.

This is where facilitated workshops can prove enormously beneficial. These sessions help develop the mission, vision, attributes, and behaviors of the organizations and individuals involved, resulting in a Relational Charter. This single-page supplementary document detailing relational ideals and mission becomes a touchstone that keeps everyone aligned. The Australian Department of Defence, BAE Systems, and Thales collaboration provides an excellent example of this approach in action.

Is a pre-contract agreement legally binding?

Sobering statistic: Only 16% of contract negotiators believe they are negotiating the right things. 

The planning paradox: “The delusion is that we write contracts to make plans, but we cannot really plan accurately.”

The general rule: Pre-contract agreements are usually not binding regarding the main deal (the sale or service provision) but are binding regarding the process elements like confidentiality and exclusivity agreements.

The trap of implied contracts is that vague language like “We accept these terms” or “Let’s proceed with this understanding” can transform a non-binding discussion into an enforceable contract faster than you can say “litigation.”

The magic phrase that protects you? “Subject to Contract.” This language signals clearly that no binding agreement exists until a formal, executed contract is signed. Without it, courts may interpret your preliminary negotiations as a binding commitment.

What’s typically binding vs. non-binding?

Understanding these distinctions before you draft is crucial. Your simple contracts shouldn’t accidentally become complex legal obligations.

The pre-contract agreement lifecycle

Let’s shift from legal theory to operational reality. The pre-contract phase covers everything from initial Request → Drafting → Negotiation → Approval. This is where “deal velocity” is won or lost. A smooth pre-contract phase means faster revenue recognition, better terms, and stronger relationships. 

Common bottlenecks that kill momentum

1. Lack of standardized: When your sales rep is drafting from an old Word doc they found in their email from 2019, you’re already behind. Contract creation needs to start from approved, current templates every single time.
2. Version control nightmares: “Which Heads of Terms did we agree to?” is a question that should never be asked. Yet it happens daily in organizations without proper document management. When three people are editing different versions of the same pre-contract, chaos ensues.
3. Slow legal approval loops: Legal teams are often overwhelmed, creating bottlenecks that stretch pre-contract phases from days into weeks. The right technology can automate routine approvals and escalate only the exceptions that truly need attorney review.

Key provisions in a pre-contract agreement

Let’s break down the essential clauses that should appear in most preliminary agreements:

1. Confidentiality (NDA): This provision is usually binding immediately and remains in force even if the deal falls through. It protects the proprietary information that both parties share during negotiations, financial data, customer lists, trade secrets, and operational details.
2. Exclusivity (No-Shop Clause): This prevents the seller from negotiating with other potential buyers for a set period (typically 30-90 days). It gives the serious buyer breathing room to complete due diligence without worrying about being outbid. 
3. Dispute Resolution: How will disagreements during negotiation be handled? Mediation? Arbitration? This clause sets expectations and can prevent minor disputes from derailing the entire deal.
4. Governing Law: Deciding the rules of engagement early matters. “Negotiations governed by New York Law” versus “California Law” can mean different standards for good faith negotiation, enforceability, and remedies. 

Understanding contract terms and how they interact is essential for crafting effective preliminary agreements.

Examples of pre-contract agreements

Let’s look at what happens when organizations get the pre-contract phase right or spectacularly wrong:

General Motors transactional failure

General Motors relied on arm’s-length transactional contracts and power-based supplier strategies, treating suppliers as interchangeable and emphasizing financial criteria over relationships. The result? Significantly higher transaction costs, lower information sharing, and low trust levels contributed to the company’s eventual decline and 2009 bankruptcy.

The lesson: Pre-contract agreements that focus solely on price while ignoring relationship-building and collaborative structures create brittle partnerships that fail under pressure.

Risk mitigation through digitization

One CLM-enabled organization’s procurement team digitized 1,700 renewal contracts in just eight months. The outcome? Enhanced visibility, better budget management, and improved negotiation processes that prevented contract value leakage.

Efficiency gains in the energy sector

An oil, gas, and energy company dedicated significantly more time to pre-bid market engagement compared to other sectors, 21% versus the 15% average. This upfront investment in the pre-contract phase delivered results: approximately 13% better-than-average cycle time from bid to contract award.

Negotiation leverage through data

A commercial manager queried historical contract data before negotiation to find instances where the counterparty had previously agreed to specific favorable terms. Armed with this intelligence, they successfully moved a material term in their organization’s favor and in alignment with principles and practices that might otherwise have been rejected.

These examples prove that the pre-contract phase isn’t just administrative overhead. 

Risks of poorly managed pre-contract agreement phases

The consequences of pre-contract mismanagement are measured in lost deals, litigation, and competitive disadvantage.

At-risk clauses: Your team exchanges emails discussing terms. One party says, “Agreed, let’s proceed.” Six months later, you want to know if those emails create a binding contract? You might learn about thighs that could have been avoided with clear “Subject to Contract” language.

Operational drag: You thought pricing was settled in the MOU. Your counterparty thought it was a starting point for negotiation. Now you’re renegotiating terms that were supposedly “agreed” weeks ago. Time wasted, momentum lost, and trust damaged.

Loss of leverage: Committing to price in the pre-contract before fully scoping legal risk is like showing your poker hand before the betting round ends. Once you’ve committed to a number without understanding all obligations, you’ve lost your negotiating power for the final agreement.

How to streamline the pre-contract phase

Research shows that 67% of organizations without contract lifecycle management systems are actively looking to purchase one. They recognize that manual pre-contract management is a competitive liability.

Here’s how leading organizations are transforming this critical phase:

1. Request/intake automation

Often called legal’s “front door,” this phase is the initial support request. Modern CLM tools automate this using intake forms with both automatic and manual field population. Legal teams can assign requests, track progress, and capture basic metrics like volume and type. No more requests lost in email threads or unclear priorities.

2. Intelligent drafting and creation

Advanced systems have evolved beyond simple templates into sophisticated “contract building” capabilities. These systems assemble documents from predefined clauses and clause alternatives (fallbacks), either through manual selection or guided decision trees.

Critically, modern CLM platforms can ingest and manipulate third-party templates and forms, because in the real world, you don’t always control the paper. Understanding both contract drafting and contract signing best practices ensures your process flows smoothly from start to finish.

3. Use clause libraries strategically

Ensure “Subject to Contract” language is auto-inserted in every draft. Your clause library should include battle-tested provisions for confidentiality, exclusivity, governing law, and dispute resolution. No sales rep should be drafting these from scratch or memory.

4. Implement audit trails

Track every change from the first term sheet to the final agreement. Who suggested the pricing adjustment in paragraph 3? When was the exclusivity period extended? What version did the client actually agree to? Without this visibility, you’re flying blind and vulnerable to disputes about “what we agreed to.”

Drafting a safe LOI: Your checklist

Every Letter of Intent or preliminary agreement should include:

✓ Clear “Subject to Contract” or “Non-Binding” language (except for specified provisions)

✓ Expiry date (creates urgency and avoids indefinite obligations)

✓ Identification of which provisions are binding (confidentiality, exclusivity, etc.)

✓ Governing law specification

✓ Process timeline and milestones

✓ Conditions precedent to moving forward

✓ Termination rights

Following these practices transforms the pre-contract phase from a source of risk into a source of competitive advantage.

Master the pre-contract phase

Pre-contract agreements are useful tools for building deal momentum. The difference between a smooth path to signature and a legal nightmare often comes down to how carefully you manage preliminary documents.

The best organizations have moved from “email chaos” to structured CLM platforms that safeguard intent, automate compliance, and provide complete visibility into every stage of negotiation. They understand that the pre-contract phase isn’t just paperwork; it’s where relationships are built, terms are shaped, and competitive advantage is created.

Don’t let the pre-contract phase be a black box in your organization. The companies winning deals faster, with better terms and fewer disputes, are the ones who’ve mastered this critical phase.