Nowadays, when we talk about funding, we tend to synonymise it with Venture Capital or third party investment. When we find such investor the first thing which comes up is signing of TERMSHEET.

 

The word term sheet is broad and pops up with lots of confusion in mind. Many even fail to understand whether it is legally enforceable or not. Legal enforceability of TERM SHEET is ZERO

 

The term sheet is a document outlining the material terms and conditions of a business agreement between a startup and a potential investor. The arrangement of a business exchange, for the most part, begins with agreement upon the terms of business in the form of term sheet. The term sheet is a declaration of what parties intend to accomplish upon by the agreement, instead of what they eventually concur upon.

 

It is a relatively short document that an investor prepares for presentation to the company in which the investor states the investment that he is willing to make in the company. This is at the transaction stage and aides in getting down to business the last term of the agreement.

 

Basically, a term sheet is an agreement that sets forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legal documents and is the basic tool for negotiation. It is more like an offer to invest under specific conditions.

 

A landmark decision with regard to enforceability of side letters came before the English Courts in the case of Barbudev vs. Eurocom Cable Management Bulgaria EOOD and others. The main issue that was sought to be resolved by the claimant was whether a side letter (term sheet) signed by the parties could be enforced.

 

Before High Court, it was held that the side letter did not show any intention to create legal relations, and the terms were too uncertain, therefore making it unenforceable. The matter went before Court of Appeal, and the main contentions of the claimant were:

(1) the parties did intend to create legal relations; and

(2) the side letter was more than an agreement to agree, and hence, enforceable.

 

Here, the court came to conclusion that the tem sheet did intend to create legal obligations as it was drafted by external legal advisors, it was drafted in legal language, it referred to an English statute and provided for a provision to be governed by English law and a clear intention as to the binding nature of confidentiality clause.

 

The court came to the conclusion that the sheet intended to create legal obligations. However, on the question of enforceability of the legal relationship forged between the parties due to the letter, the court said that it amounted to no more than an agreement to agree. It was merely an instrument by which respondents had agreed to negotiate with claimants in good faith.

 

Hence, a distinction was set between:

a) intention to create legal relations and

b) the enforceability of the said relations

 

This is a two step process that needs to be followed while determining the binding nature of the agreement between parties. Firstly intention has to be ascertained by following the communications and information that was exchanged between the parties and later the enforceable nature of the contract needs to be ascertained.

 

The above case shall have implications in India too. In India, we have to look at the facts of each case and decide accordingly, in consonance with the provisions of Indian Contract Act, 1872. The following broad conditions must be satisfied:

 

1. There exists a clear intention to create legal relations.
2. That it is not an agreement to agree into an agreement.
3. The terms are clear and unambiguous.
4. The subject matter is certain.
5. There is a flow of consideration.

In a case it was held that there is nothing expressly agreed between the parties and no concluded enforceable and binding agreement came into existence between them. The correspondence exchanged between the parties, shows that the parties were only negotiating and had not arrived at any agreement. There is a vast difference between negotiating a bargain and entering into a binding contract.

 

Generally, term sheets are non- binding in nature, but they can become legally binding if executed on a stamp paper. The provision for its nature being non-binding can be inserted in the term sheet itself. Parties should be careful while drafting these documents at the negotiation stage. Term Sheet: Not legally enforceable agreement.

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