Business Law

All you need to know about Term Sheet

By Shubhi Shukla

Introduction 

A legally binding agreement between two or more parties who come together for consideration is known as a contract. It also includes all of the rights and duties that the parties must uphold throughout the duration of the arrangement. Before the final contract is signed, there are numerous rounds of pre-contractual discussion between the parties in order to ensure that it is easy to understand and hassle-free. Before the contract’s terms are agreed upon, there are numerous negotiations that take place. The parties also present their goals, objectives, rights, obligations, potential risks, and other details. Although the pre-contractual agreements are not legally binding, the parties may decide to make them so. A Memorandum of Understanding (MOU), a Non-Disclosure Agreement (NDA), and a Term Sheet are examples of pre-contractual documents. The article will go over the definition, aim, and application of a term sheet. Additionally, it contains the clauses that must be written into the term sheet.

What is a Term Sheet?

A term sheet is a legal document that sets forth the proposed terms and conditions that parties to a commercial agreement will be required to abide by. A term sheet is a prospective document since it serves as a roadmap for attorneys to efficiently draft transactional documents. A drafted term sheet could serve as the foundation for numerous additional transactions in the future. Term Sheets are non-time-specific pre-financial papers. They represent the initial phase of investment contracts including shareholder agreements and share purchase agreements, among others. These Term Sheets will most likely develop into investment contracts and go into effect. Before the execution of the Agreement, the Term Sheets are signed once both parties have agreed to its provisions.

What is a Term Sheet for?

A thorough document created as a pre-contractual instrument for financial transactions is known as a term sheet. Investors and firm founders who are parties to the term sheet are free to discuss and negotiate the conditions without being constrained by the document’s inflexible language. Additionally, it must be guaranteed that all of the provisions in a term sheet are clearly stated to prevent misunderstandings and disagreements between the parties in the future.

Term Sheets, both binding and non-binding

A binding term sheet can be enforced in court and suggests that the parties are required to uphold the duties stated therein. Many business owners mistakenly believe that the term sheets are not legally binding and that they have the freedom to renegotiate the deal. A term sheet is usually somewhat binding, therefore to say that it is non-binding is a “misnomer.” This term sheet is non-binding except for Clause XYZ, which shall be legally binding on the parties, as stated in the “preamble” of a term sheet, which often indicates the partially binding character. Even though nature might not be mentioned in the term sheet, it can be inferred from the scenario’s facts and the term sheet’s clauses. For instance, terms like “Confidentiality,” “Exclusivity,” “Governing Law and Jurisdiction,” etc. imply that a term sheet is only partially enforceable and that its nature may change from one situation to another.

However, even though a term sheet is not legally binding unless certain articles have been agreed upon, it is frequently challenging to renegotiate its terms because doing so would reveal the unreliability of the party making the demand. It becomes even more challenging if one of the parties has already started developing these terms internally, which might waste time and effort if renegotiation occurs. A term sheet produced in this manner is therefore binding because it has informal enforceability.

A case study

In spite of the term sheet’s clear mention that it is non-binding, Zostel Hospitality Pvt. Ltd. v. Oravel Stays Pvt. Ltd. (Zostel) highlights how it might nonetheless become binding later on depending on how the court decides to interpret the specific facts of a case. A term sheet was signed by the parties in this case with the intention of acquiring assets including intellectual property rights, software, key workers, etc. The claimants (Zostel) assert that they followed the terms of the term sheet and carried out all of its requirements.

Issue

 Does the term sheet constitute a binding, enforceable agreement in terms of the parties’ activities, as claimed by the claimants, or is it non-binding as indicated in it?

Held

The Arbitration Tribunal determined that the term sheet was legally binding in light of the claimants’ actions to meet the duties listed in the term sheet’s annexure.

Analysis 

The tribunal noted that the respondent had engaged in or demonstrated interest in communication regarding the performance of specific tasks. Therefore, contrary to what the respondent claims, the term sheet cannot be regarded as meaningless and non-binding.

This demonstrates the importance of exercising caution when acting in accordance with the execution of a non-binding term sheet in order to complete the transaction and make the term sheet binding.

The case of GAIL (India) Limited v. M/s Sravanthi Energy Private Limited

This is another notable example of a term sheet that was referred to as a contingent contract between the parties. When deciding whether GAIL (India) engaged in unfair competition, the appellate tribunal considered the issue of whether the term sheet is legally binding and whether the Gas Transmission Agreements (GTA), which were a component of the same transaction, were never put into effect because the prerequisite conditions outlined in the GTA were never satisfied. The tribunal ruled that the term sheet was an unenforceable dependent contract subject to a precondition. The term sheet that the parties signed between them was contingent upon a condition precedent, and because that condition precedent was not met, the term sheet became frustrated and was never transformed into the intended agreement (the Gas Supply Agreement), making it contingent. This serves as a warning to all parties engaging in a term sheet, advising them to carefully consider the antecedent conditions for the purpose of enforcing it.

Perspective on drafting

Choosing the type of duties that the parties want to establish is one of the primary factors that must be taken into account when establishing a term sheet. This can be further explained in terms of the three main categories of term sheet obligations: unilaterally binding, non-binding, and binding. We’ve already talked about binding and non-binding term sheets, showing that a term sheet’s nature depends on the clauses we include in it. Term sheets that are unilaterally binding are less often than term sheets that include binding and non-binding provisions. It imposes obligations on a party that might attempt to change the conditions or on a party, typically a startup, where the investor lacks knowledge of the facts.

From an Enforcement Perspective

As was previously stressed, enforceability depends on how the facts and circumstances are assessed by the court if there is a disagreement between the parties over the enforceability issue. The Oyo-Zostel disagreement makes it obvious that a judge or arbitrator cannot only rely on a section declaring whether or not the terms of the term sheet are binding. It must be determined whether further terms, relevant information, and contractual duties have been met. Therefore, it’s feasible that the authorities will interpret the non-binding term sheet as being binding.

Principal Differences :-

 Enforceability Perspective  Drafting Perspective

  • The primary factor under it is to remember if the term sheet is intended to be binding or non-binding.
  • obligations performed in order to fulfill the terms of the term sheet and complete the transaction.

Drafting Perspective

  • The legal analysis of the situation determines the type of term sheet, including whether it is legally binding or not.
  • The term sheet’s binding nature may be interpreted as applying to obligations fulfilled in the course of consummating the transaction.

Signing of the contract

Term Sheet is not a binding contract; rather, it is more akin to a gentleman’s handshake. The conditions of the Term Sheet are not legally enforceable because the parties have the right to return to the agreement and change any elements that have already been mutually agreed upon. Confidentiality, exclusivity, dispute resolution, condition precedent, fees and expenses, and other clauses are typically binding in a term sheet.

Change to the term sheet

A Term Sheet has the option to be amended since it is regarded as a substantial pre-contractual instrument and because it is a legal document like any other. A term sheet includes an amendment providing that can be used to change the terms of the term sheet. The only restriction on changing a Term Sheet is that both parties must agree to any changes before signing the final contract.

Transactions involving term sheets

Transactions involving private equity (PE) and venture capital (VC)

Term Sheets are commonly used in important financial documents like PE and VC. Private equity is when money is invested in a business that is not publicly traded. Investing in fledgling businesses or entrepreneurs with the potential for long-term growth is known as venture capital.

Term Sheets are used in merger and acquisitions (M&A) deals and financial transactions, respectively. In this case, the firms and assets are combined through different financial transactions. These consist of tender offers, consolidations, mergers, and acquisitions.

What distinguishes the Term Sheet from the Letter Of Intent?

The terms “Term Sheet” and “Letter of Intent” are sometimes used interchangeably and as synonyms, however they differ in the following ways:

Letter of Intent

  • All business transactions, including lease agreements, purchases, and other dealings, are covered by LOI.
  • proposals or unilateral LOI.
  • Here, the parties’ main motives are revealed.

Term Sheet

  • Term Sheets are negotiations between two parties.
  • The only things on a Term Sheet are investment ideas.
  • Here, the key topics that must be discussed in order for financial transactions to take place, are negotiated.

Indian Scenario

If the enforceability of such agreements needs to be taken into account, we must examine the specifics of each situation and make a decision in accordance with the guidelines of the Indian Contract Act, 1872. The broad prerequisites listed below must be met:

  • The desire to establish legal links is very evident.
  • because consenting to a contract is not an agreement.
  • The terms are unmistakable and obvious.
  • The topic is well-defined.
  • There is a progression of thought.

Particular execution of a validly closed contract may be upheld under Section 9 of the Specific Relief Act of 1963. The offended party who is guaranteeing particular execution of the agreement needs to demonstrate that the conditions for the legitimacy of the agreement tried to be upheld are fulfilled.

Any First Party may enter into an agreement with the other party and, from that point on, issue the other party with a side letter for the purposes of setting up, operating, and carrying out specific things that are legally admissible. Ascent to legally enforceable rights and obligations will be made available under both the Agreement and the Side Letter.

Conclusion

One of the most important pre-contractual devices is the term sheet. Except for the clauses that are clearly specified to be binding, it is normally of a non-binding nature. Exclusiveness and secrecy provisions are frequently seen as binding. It in particular sets forth the fundamental conditions of an investment agreement. The language and terms of the provisions typically indicate if the Term Sheet is meant to be legally binding. As a prelude to the investment agreement, the Term Sheets are frequently used as a document where the terms are negotiated between the investors and founders. They are typically connected to startups. The terms “term sheet,” “letter of intent,” and “memorandum of understanding” are frequently used synonymously since they are similar legal papers with related purposes and frequently share material. However, the three documents are not identical and differ slightly from one another. A term sheet’s primary function is to create the groundwork and guarantee that all parties to the investment transaction and most of its terms are aware of what is expected of them. And a solid term sheet is one that may align the interests of the investor and entrepreneur, which benefits everyone involved in the transaction in the long run.

Categories: Business Law, Company Law

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