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Term Sheet

What is the Legal Status of a Term Sheet?

Have you been wondering about a term sheet’s legal status? If yes, then you should start reading the blog that we have come up with for you!

Term sheets are quite commonly considered as “side letters”. These are a supplementary document to another contract, adding, clarifying, or amending the foremost contract. It was never intended for term sheets to be legally binding, or, conversely, there was no consideration. Hence, it was not enforceable. The Court dismissed both of these defences. Since there was no written contract, the Court did not view acceptance of it as a completed contract and declared it void. Term sheets are often not lawfully binding, but they can be made if signed on stamp paper. Learn more about Legal Status of a Term Sheet. 

The clause clarifying that term sheets are non-binding by nature can be included in the document itself. The structure of a commercial transaction normally begins with the terms agreement. Term sheets specify whatever the parties want the Agreement to accomplish, not what they will finally agree upon.

What is a term sheet used for? 

Parties make use of the vital term sheets in the sale and purchase transactions in the business. However, there are many other functions that it can cater to. Some of them are mentioned below: 

  • Capital raising
  • Partnership arrangements 
  • Business transactions
  • Purchasing and selling of shares 
  • Negotiations in commercial leasing

The critical function proffered by a term sheet is to ensure that the notable key terms are documented in the finest possible manner. Not only this but they should also be agreed upon before both parties are all set to review the final formal contract. This leads to minimising any red lining of the agreement the moment it is finalised. 

Is a term sheet legally binding? 

Yes, a term sheet can be legally binding only if both parties agree to its key terms. Term sheets would need to be specifically stated in the agreement if the parties wanted to make it enforceable. Term sheets must be specific in case it has been rendered legally binding. Additionally, every clause mentioned in the legal documentation should be outlined. 

On the other hand, if term sheets are non-binding, then it shall be represented as a proposal and not as a document. This has to be agreed upon by both parties. 

What is included in a term sheet?

It is quite essential for term sheets to have the right content. If there isn’t much information in the document, it can lead to many uncertainties in the transaction. But, you also need to note that a lot of information can also delay the overall negotiation process. Thus, the information in term sheets need to be right and on point. The key inclusions present in a term sheet are mentioned below: 

  • Assets to be brought

Firstly, you are going to define the notable assets which you are going to sell or purchase for your company. You should always outline what can the buyer expect from the same. If you want to avoid any kind of ambiguity, make sure that you are outlining all those items which have been taken out of the transaction. 

  • Conditions to be met

Certain conditions should be mandatorily met before your transaction finally completes. Also, each one of them should be highlighted in the Agreement. 

  • Enforceability

In this case, you should mandatorily specify if or not term sheets stands legally bound. Whatever the case, you should mention the same in the document, so there are no further disputes. 

  • Confidentiality 

Yes, you would have already signed the whole non-disclosure agreement, but mentioning the same in the term sheet is mandatory. In addition, there needs to be a significant confidentiality clause present in the significant term sheet. Through this, it is ensured that the parties respect the confidentiality of each other’s information. 

  • Key terms

Key terms should be associated with outlining the liability’s transfer between the two parties. 

  • Costs

When it comes to business transactions, both parties stand responsible for their own cost. However, there should also be a clause mentioning the legal and third-party transaction costs just in case any parties breach the important sale agreement. 

  • Termination 

It should also specify the information related to the how and when of the Agreement’s termination. 

Last Words

When you act as a party to any business transaction, you cannot imagine its completion without a well-drafted term sheet. A lot of factors should be kept in view while the parties agree on the key terms for the business’s sale transactions. They include: 

  • Assets to be included in the sale
  • When will the purchase price be paid
  • The conditions which are quite mandatory for the precedent for any transaction.

A term sheet can be both binding and non-binding legally. This depends upon what the parties are agreeing on. If you need some more assistance regarding reviewing or drafting your term sheet, talk to Vakilsearch. This legal firm ensures that you stay well-protected throughout your business’s tenure. 

 A Few Frequently Asked Questions 

What do you mean by a term sheet?

Term sheets refers to a notable document used by the parties involved. They agree upon and outline the key commercial terms related to the business transactions via the term sheet.

What is the function proffered by a term sheet?

The main purpose served by a term sheet is that it always ensures that the vital key terms have been documented in a better way. This also makes sure that the protracted negotiation is minimised.

Is a term sheet considered legally binding?

Term sheets cannot be considered as legally binding if the parties don’t have a mutual yes. Both parties need to mention it in the Agreement if they want to make term sheets legally binding anytime soon.

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