Is my term sheet binding even if it says it’s not?
Term sheets are a crucial element in the early stages of any business transaction, particularly in the context of venture capital deals, mergers and acquisitions, and joint ventures. These documents outline the key terms and conditions of a proposed agreement between parties, set the tone for future negotiations and serve as a blueprint for the final, legally binding contract.
Term sheets may be expressed to be:
- legally binding: meaning the parties expect to enter into a legal relationship and be liable to each other if they do not follow through on any obligations in the term sheet;
- non-legally binding: meaning the intention of the parties is that they will not be liable to each other if they do not carry out their obligations under a term sheet; or
- a mixture of both: some clauses of term sheets may be expressed to be legally binding, such as confidentiality provisions, exclusivity and governing law, whilst the rest of the provisions are expressed to be non-legally binding.
Even where term sheets have been expressed to be non-legally binding in their entirety, certain provisions can be enforceable. Court cases, including some recent ones, have found that some agreements, even though they were expressed to be non-legally binding, were in fact held to be enforceable.
Therefore, understanding what you need to include in a term sheet for it to be non-legally binding and the conduct you must follow to demonstrate this is extremely important. After all, you don’t want to end up liable for damages and/or compensation for something that you did not intend to be legally binding.
Factors to take into account when entering into term sheets if you wish them to be non-binding
A court will determine objectively whether the parties intended to create legally binding relations based on a number of factors, including:
- Conduct: If a term sheet states it is non-binding but your conduct, and the conduct of the other party, suggest that it is a binding relationship, then you might be in trouble. This could include things such as the commercial circumstances of signing the term sheet, the subject matter of the term sheet and if you have carried out or performed any part of the deal.
- Finality of terms: If you have agreed to most of the terms and ironed out a large number of details of the deal, it may be more likely that your term sheet is legally binding. However, if you still have a lot of details and terms of the deal to flesh out, then it will be less likely that your term sheet is considered legally binding.
- Performance of terms: If you have carried out some of the items in your term sheet, it’s more likely to be considered legally binding. This could include things like paying money such as a deposit to the other side, signing further legally binding agreements or engaging service providers to work on the deal.
This means that even if your term sheet states it is non-binding, you must take care that your conduct and actions also reflect this intention.
It is important that you not only have your term sheet drafted well if you intend it to be non-legally binding, but that your conduct and the conduct of any other party involved also matches this intention. This can be a fine line to walk, especially if you are excited to go through with a deal.
A term sheet is also significant from a strategic and negotiation perspective as it sets the parameters for future negotiations between the parties to some extent. It’s important to remember to consider the commercial big picture and the future relationship you want to have with the other party and not just the legalities of whether a term sheet is binding or not.
Engaging a commercial legal team from the start, who is well versed in preparing non-binding (or binding) term sheets for any deal will be key to your success.
