Blog Details

Term Sheet:

In most cases, the arrangement of a commercial transaction starts with an agreement on the conditions of business in the form of a term sheet. Instead of stating what the parties will ultimately agree upon, the term sheet states what the parties desire for the agreement to achieve. Term sheets are often known as "side letters" or "letters of intent. "A side letter is essentially a document that is auxiliary to another contract, clarifying, adding to, or amending the first contract. The buyers and sellers typically use a letter of intent to confirm their understanding of the important parameters of the exchange, such as valuation, closing date, financing, due diligence, and other key arrangement elements. This is being done at the transaction stage and helps with the final term of the agreement. Such statements are not legally binding, as is a generally accepted principle of contract law. These letters' provisions may be interpreted to be contrary to real contractual purpose. A side letter of nature that is portrayed only compels the parties to negotiate in good faith and nothing else. However, occasionally include legally binding clauses regulating confidentiality, marketing, or negotiating exclusivity. A letter of intent is drafted as a letter, as the name implies, whereas a term sheet is more frequently a summary of the key provisions of the anticipated contract or agreement.

Major Transactions & Elements of Term Sheet:

Major transactions, where term sheets are used are mergers, takeovers, joint ventures, loans by financial institutions & banks, amalgamations, investment in companies, start- ups,etc. . Only the majority of a business feature that the parties wish to debate on the border idea is contained in the Term Sheet. The term sheet does not cover all the specifics of investment agreements. Some important elements that term sheets go through are, nature of business of parties including information of parties; the object & purpose of transaction parties intend to enter;, the time period of completion of the transaction intended; details upon the work need to be done by every party; consideration for the transaction; in case of joint ventures, the profit sharing ratio or the details in which profits would be shared; and in case of investment for equity, the valuation of the company which is in question.

Legal Aspect of Term Sheet:

The main question with respect to the term sheet is whether it is legally binding & enforceable or  not legally binding & not enforceable. The whole question regarding this ambiguity, finds its solutions on a few basic elements, which through time has been formed through judicial decisions. The main elements to ascertain whether a term sheet is legally binding and enforceable or not are, namely:-

1. Is there an intention to enter into a legal relationship?

2. Is a term sheet creating a contract to enter into a contract, and is making it legally enforceable.

3. Is there consensus ad idem I.e., meeting of minds?

4. Is there any flow of consideration, or are the acts of parties done asper the conditions and create confidence.

5. The subject matter and terms of the agreement.

The leading case of term sheets is the English case of Barbudev v. Eurocom Cable Management Bulgaria EOOD and Ors.[2012] EWCA Civ 548, 27 April 2012, in the said case, when deciding whether terms in a letter of intent were enforceable legally, distinction was made between a) the intention to create legal relations and b) the desire to enforce the specified relations. The court ruled that despite the fact that the letter was written in legalese, which could be interpreted as creating a legal obligation, it can only be viewed as an agreement to agree and will not be enforceable in a court of law. It only serves as an agreement between the parties to engage in good faith negotiations with claimants.

Term Sheets legal standing in light of Indian Laws, are addressed by the Supreme Court in the following judgments, namely:-

1. Rajasthan Cooperative Dairy Federation Ltd. Vs. Maha Laxmi Mingrate Marketing Services Pvt. Ltd. and Others- 1996 10 SCC 405, The acquirer was authorised to terminate the term sheet or letter of intent if the conditions outlined in it are not met by the sell side and the conduct of the sell side in general is not one that would inspire trust. The parties do not yet have a binding legal connection, so the acquirer was within his or her rights to consider all the relevant factors before determining whether or not to engage in a contractual contract.

2. In DDA Vs. Durga Chand Kaushish, 1973 2 SCC 825, Supreme Court in its opinion said that the term sheet, must be read as a whole to determine the legal intention of the parties.

3. Rickmers Verwaltung GMBH Vs. Indian Oil Corporation Limited- 1999 1 SCC 1, Consensus ad idem, or a meeting of the minds, can be determined from the actions of the parties even though a legally binding agreement has not yet been signed by all parties. Therefore, even a non-binding agreement might be regarded to be binding if the parties' actions clearly demonstrate their shared viewpoint.

4. South Eastern Coalfields Ltd. Vs. S. Kumar’s Associates AKM (JV),2021 SCC Online SC 486, the court was of the opinion that the idea that a letter of intent only reflects a party's intention to engage into a contract with the other party in the future is easily supported by the judicial opinions. At this point, no legally binding relationship between the parties develops, and each case must take the entirety of the circumstances into account. A letter of intent may undoubtedly be interpreted as a legally binding agreement if its terms indicate that this is the intention. But since it deviates from how a letter of intent is typically regarded, the intention to do so must be explicit and unmistakable.

Conclusion:

A very helpful initial document is the term sheet or letter of intent. It establishes a wider framework for the parties to have fruitful business negotiations leading to the signing of binding contracts and ultimately the completion of a transaction. It is typically of a non-binding nature. It may be interpreted as a binding document, though. To avoid unnecessary legal issues in the future, parties interested in conducting business in India should be aware of the aforementioned elements before signing any term sheets, letters of intent, or agreeing to their conditions.

References

• https://blog.ipleaders.in/term-sheet-legally-enforceable/#:~:text=Generally%2C%20term%20sheets%20are%20non,documents%20at%20the%20negotiation%20stage.

• https://taxguru.in/corporate-law/term-sheets-business.html

• https://www.lexology.com/library/detail.aspx?g=d1648af8-d50f-4c3d-a9e6-438c4180724a

• https://www.mondaq.com/india/contracts-and-commercial-law/1081844/oyo-zostel-dispute-the-extent-to-which-a-term-sheet-may-be-enforceable-

• https://www.mondaq.com/india/contracts-and-commercial-law/1101840/binding-and-non-binding-term-sheets-drafting-v-enforcement

• Barbudev v. Eurocom Cable Management Bulgaria EOOD and Ors.[2012] EWCA Civ 548, 27 April 2012

• Rajasthan Cooperative Dairy Federation Ltd. Vs. Maha Laxmi Mingrate Marketing Services Pvt. Ltd. and Others- 1996 10 SCC 405

•  DDA Vs. Durga Chand Kaushish, 1973 2 SCC 825

• Rickmers Verwaltung GMBH Vs. Indian Oil Corporation Limited- 1999 1 SCC 1

• South Eastern Coalfields Ltd. Vs. S. Kumar’s Associates AKM (JV),2021 SCC Online SC 486