Don’t sign the term sheet!

Parties sometimes sign a term sheet, or at least verbally agree its terms, before drafting and negotiating the (full) agreement. The term sheet summarises the main terms of the proposed agreement, and is usually stated to be non-binding.

This can be an efficient way of managing a transaction. Sometimes, though, the best advice may be to avoid making a commitment to the term sheet, even if it is stated to be non-binding.

During a recent conference call with a client and a lawyer representing another party to a proposed transaction, the lawyer not unreasonably justified terms in a draft agreement by referring back to the term sheet. “The parties agreed this point in the term sheet” was the refrain.

And yet… The term sheet was based on a template that the more experienced of the two parties had prepared. It was 13 pages long, and included many detailed terms of a legal nature that went beyond a “high level summary”. In our view the term sheet contained some one-sided provisions that favoured the other party. Perhaps most critically, our inexperienced client had not taken legal advice on the term sheet. From discussions with the client it was clear that he did not fully understand some of the “agreed” terms.

How sacrosanct should the term sheet’s provisions be in these circumstances? Should they be treated as a guide to points of commercial principle rather than as a set of detailed commandments?

This situation, or something like it, is something that we have come across many times before. In our view, term sheets work best when they have minimal legal language and focus on the key commercial terms. In most cases, it should be possible to state those terms in two or three pages of text. If you need a lawyer to translate the language, then it probably shouldn’t be in the term sheet. Alternatively, take full legal advice when negotiating the term sheet.

A quite separate issue is whether the term sheet may create legally binding obligations even if it is stated to be non-binding. An earlier posting on this blog, headed “Subject to Contract” discussed some recent English cases in this area. Where one or more of the parties is based in a civil-code jurisdiction (eg most of Continental Western Europe), an additional consideration is whether signing the term sheet may create obligations not to withdraw from subsequent negotiations, under a legal principle known as culpa in contrahendo.

This point is discussed by some of the European contributors to our loose-leaf work, Drafting Agreements in the Biotechnology and Pharmaceutical Industries (OUP, 2009 onwards). According to the Spanish contributor to that work, under Spanish law the principle may also require the parties to negotiate exclusively with one another. To try to address these issues, we often include in term sheets wording such as the following:

This term sheet is made under English law and is subject to the exclusive jurisdiction of the English courts. It is non-binding and does not create, evidence or imply any contract or other legal relationship between the parties. Either party may withdraw from the negotiations at any time without liability and the negotiations are being conducted on a non-exclusive basis.

1 Comment

Filed under General Commercial

One response to “Don’t sign the term sheet!

  1. There’s another danger that can arise with a purportedly non-binding term sheet: During negotiation of the “full” agreement, the business people, overly-eager to get started, might conduct themselves in a way that creates legal obligations between them, e.g., by establishing a de facto partnership. That happened in a Texas case a couple of years ago (Energy Transfer Partners v. Enterprise Products), resulting in a plaintiff’s jury verdict and a judgment of more than USD $500 million. As I understand it, the case is on appeal, with no published opinion from the district court; I wrote about the case (quoting key contract language and citing news reports) at http://www.commondraft.org/#SigsPerformanceNotBinding.

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