Term Sheet: The Whys And Wherefores Answered

What a Term Sheet ought to include?

Steering clear of the nomenclature, an ideal term sheet could include certain basic elements to ensure that it serves as an effective tool for mitigating risks and clearly charting out the transaction, and they are enlisted as follows:

The abovementioned elements are merely indicative in nature and not exhaustive, as each Term Sheet is custom-tailored (and should be) according to the understanding between the parties to it.

Is a term sheet binding or non-binding in nature?

Knitting an answer to the second question is an arduous task as the answer swims in a grey area. For the sake of contemplation, this ambiguity can be viewed through a judicial lens. For starters, the case of Zostel Hospitality Pvt. Ltd. (Zostel) v. Oravel Stays Pvt. Ltd. (Oyo) serves as a notable illustration of how a term sheet, even when expressly denoted as non-binding, may be adjudged as binding based on judicial scrutiny of the factual matrix. Here, the parties executed a term sheet pertaining to the acquisition of various assets, including intellectual property rights, software, and key employees. Zostel asserted that it acted upon the term sheet, fulfilling all stipulated obligations. Further, Zostel contended that it suffered harm due to Oyo's failure to perform the necessary actions and alleged breaches of the term sheet, which impeded the completion of the acquisition.

The primary issue was whether the term sheet was non-binding as stated or constituted a binding, valid, and enforceable agreement based on the actions/conduct of the parties. The Arbitration Tribunal upheld that the term sheet was binding, given that the claimants undertook substantial steps to fulfil the obligations delineated in the term sheet's annexure. The tribunal further observed that Oyo's actions indicated engagement and intent to fulfil certain obligations. Consequently, the term sheet could not be dismissed as non-binding and insubstantial. This case underscores the importance of the conduct of the parties in effectuating the execution of a term sheet, which may render it binding.

In the case of M/s Best on Health Ltd. (BOHL) v. M/s Bestech India Pvt. Ltd. (Bestech), one of the issues that surfaced when the Court had to ponder whether the Term Sheet executed between BOHL and Bestech was a binding contract. In the present case, the parties involved were BOHL (a consortium of five land-owning companies) and Bestech (a real estate developer). On 3rd September 2012, both parties executed a Term Sheet outlining the terms for joint development of a township on land owned by BOHL, agreeing to a 50:50 profit-sharing ratio. Subsequently, on 19th October 2012, they signed a collaboration agreement for developing a part of the project, which extended the terms of the original Term Sheet. However, disputes arose between BOHL and Bestech regarding the binding nature of the Term Sheet and the necessity and definitiveness of subsequent agreements.

The Court noted that the Term Sheet explicitly stated that it was binding and outlined the terms of a definitive agreement. Moreover, the Term Sheet's reference to a subsequent definitive agreement did not negate the binding nature of the Term Sheet but rather indicated further detailing of terms. Notably, the Collaboration agreement signed later reinforced the binding nature of the term sheet despite some variations in it. Finally, the Court upheld that the Term Sheet (in conjunction with subsequent agreements) constituted a binding contract.

In PVR Pictures Ltd. (PVR) v. Studio 18 (Studio), a Term Sheet Agreement (TSA) detailed the distribution terms for five films, including "SHORTKUT", specifying the exclusive rights granted to PVR for the East Punjab territory. However, for the other four films, separate and detailed license agreements were executed, which included exhaustive terms and conditions. PVR had not made any payment for the film "SHORTKUT" as specified in the TSA. The payment of Rs. 90 lakhs as advance consideration was a critical element that remained unfulfilled. Hereafter, one of the issues was whether the TSA constitutes a binding contract granting PVR exclusive distribution rights for the film "SHORTKUT".

The court held that the TSA did not constitute a binding contract or an exclusive distributor's license under the Copyright Act 1957. The conduct of the parties, the detailed nature of the separate license agreements for the other films, and the absence of payment by PVR for "SHORTKUT" supported this conclusion. The Distribution Term Sheet Agreement (TSA) was not binding on the parties. The court determined that the TSA was merely a preliminary agreement, subject to the execution of a formal license agreement, which never occurred for the film "SHORTKUT".

In another matter, the case of GAIL (India) Limited v. M/s Sravanthi Energy Private Limited examined the binding nature of term sheets, specifically when such agreements are framed as contingent contracts. The Electricity Appellate Tribunal, in addressing restrictive trade practice issues involving GAIL (India), considered whether the term sheet is binding, given that the Gas Transmission Agreements (GTA) referenced therein did not come into effect due to unmet Conditions Precedent.

Upon much deliberation, the Tribunal concluded that the term sheet was a "contingent contract subject to condition precedent and was not enforceable." The failure to satisfy the Conditions Precedent meant that the term sheet did not mature into the intended Gas Supply Agreement, thereby rendering it non-binding. In a way, the Tribunal's decision hinged on the fact that the term sheet was explicitly contingent upon certain conditions that were never fulfilled. This case emphasises the necessity for parties to meticulously delineate and satisfy conditions precedent to enforce a term sheet.

From the aforementioned findings, it becomes clear that a court assesses the parties' conduct and infers whether the intention expressed in the correspondence was to create a mutually binding contract. In Addition, the binding nature of a Term Sheet is activated when it encompasses essential conditions agreed upon by the parties. Culling out the intentions of the parties involved, the language deployed while drafting the term sheet, the conduct of the parties, etc., suggest that a term sheet must be scrutinised as a single unit without dissecting any section of it as an exclusive organ in order to reveal the true nature.

The focal point of a term sheet's nature cannot be the mere nomenclature that the parties draft. In that regard, simply labelling a term sheet as 'non-binding' would not make it one. The standard initially treated a term sheet as bereft of legal sanction, but when parties in consideration pursue some actions and adhere to the terms so inked, even the Courts and Tribunals unearth the scope of equity in it. Imperatively, The Judiciary finds the need to arm itself with the tools of commercial justice. All in all, the parties to a Term Sheet must remain watchful of their conduct. Any compliance with the terms of a non-binding agreement (for the completion of the transaction) can cloak it as a binding document. Finally, if 'to be or not to be' is the question in regard to the nature of a Term Sheet, the answer is 'Maybe'.

What can parties to a Term Sheet do to avoid pitfalls?

The intricacies surrounding a Term Sheet shape the need to address a caveat to the Parties: 'take ego out of it'. The parties should be cognizant that pragmatism (in most cases) pays off more than bravado. They should refrain from viewing negotiations as a zero-sum game. Parties should realise that Term Sheets are not battles to be won but blueprints of collaborations to be forged.

The moment parties gear up for negotiations over a term sheet it is advisable to be equipped with a legal expert. And while parties should understand every deal term, they shouldn't negotiate each one of them. Learning when to give and when to dig in is probably a perfect blend for early negotiations. Like in any negotiation, leverage is key. A party to a term sheet should understand the leverage the party has and does not have before they sit down to discuss the terms. To borrow the words of Andrew Beebe (MD of Obvious Ventures) :

“The most important term in the term sheet is not a legal one - it's who you're working with.”

Parties often downplay the vitality of due diligence. Once both parties have agreed upon the term sheet's framework, the due diligence phase commences. This is exactly where a rigorous examination of the parties' financials, operations, and legal standing has to be conducted. By its very nature, due diligence can be an extended pursuit comprising financial audits, legal reviews, and even market assessments. This phase acts like a bridge between a Term Sheet and a Definitive Agreement.

Parties must realise that a Term Sheet is not merely a matter of deciphering complex legalese but also about sailing through the troubled waters of a transactional voyage. Keeping that in mind, the Parties at both ends must accept that Term sheets are just the beginning and not the end. To draw an analogy, just having a recipe beforehand can do wonders for a dish. Similarly, a well-knit term sheet can act as one if the delicacy is a perfectly cooked commercial venture.