Term Sheet: To Be (Binding) Or Not To Be?

[By Aditi Sheth]

The author is a student at the National Law School of India University.

This paper argues that courts must not overrule the explicit intention of parties on the binding value of their term sheet by finding intention in the performance/non-performance of the conditions precedent (“CPs”) clause. It borrows from law and economics jurisprudence to support this claim.


Commercially sophisticated parties enter into term sheets that set out the material terms of the deal before entering into definitive agreements. Term sheets allow them to reach consensus on material terms and reach deal certainty before spending time and resources on due diligence and definitive agreements. Despite this key advantage, some lawyers advise against entering into term sheets because of the risk of uncertainty surrounding their binding value. Courts may find “non-binding” term sheets to be binding and vice versa. In India, the lack of a well-developed jurisprudence has increased this risk. This paper clarifies the muddles surrounding the binding value of term sheets in the context of performance of CPs detailed in the term sheet.

Understanding conditions precedent

CPs are conditions that must be fulfilled before closing the transaction. Parties may choose to specify these conditions in either their term sheet or their definitive agreements. For instance, the IVCA model term sheet recommends listing CPs directly in the definitive agreements. However, some parties may choose to place CPs that are material to the deal in their term sheet to ensure there is no mismatch of expectations between the parties.

The binding value of a term sheet should not be affected if parties were to place CPs in the term sheet instead of definitive agreements. This is because placing CPs in a term sheet does not impact the timeline according to which parties have to perform the CPs. Parties may perform CPs any time before the closing of the transaction, even after the signing of definitive agreements. In other words, parties are free to wait for the performance of CPs till definitive agreements are signed since the only significance of placing CPs in the term sheet is of signalling materiality.

However, Indian jurisprudence has viewed it differently. Tribunals have found a term sheet labelled “non-binding” to be binding due to the performance of several CPs (Zostel v. Oyo) and a term sheet labelled “binding” to be non-binding due to the presence of several CPs (GAIL v. Sravanthi). This paper argues against this jurisprudence by using the only two relevant and publicly available cases as test-suites.

Zostel v Oyo – “non-binding” term sheet found binding

Oyo and Zostel entered into an acquisition term sheet according to which the acquisition was conditional upon performing CPs detailed in the term sheet itself. The dispute arose when Oyo abandoned the acquisition process before the parties executed definitive agreements. Before the arbitral tribunal, Zostel sought specific performance of Oyo’s obligations under the term sheet, while Oyo claimed that the term sheet was non-binding and thus, had no obligation to pursue the transaction.

Pertinently, the preamble of the term sheet explicitly stated that it was non-binding. Instead of deferring to the parties’ explicit choice, the Tribunal examined the clause on closing, which mentioned several CPs to determine whether the parties intended the term sheet to be binding.

Merely because these conditions were necessary for closing the transaction, the Tribunal held that closing was the “natural and only consequence of compliance of these conditions”. Moreover, the Tribunal explicitly noted that “execution of definitive documents was not independent of the term sheet”, effectively collapsing the distinction between the two. Furthermore, the Tribunal claimed that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements and that without definitive agreements, Zostel had no incentive to comply with the CPs mentioned in the term sheet.

 Critical analysis

The Tribunal erred on three accounts.

First, it failed to realise that despite the performance of CPs, parties do not need to close a deal. They are free to walk away even after the performance of all CPs if there is no consensus on other terms considering the parties intended the term sheet to be non-binding. This understanding is also manifested in clause 7 of the term sheet, which stated that “subject to the conditions set forth in this Term Sheet, the parties shall mutually agree, execute” the definitive agreements. Thus, this term sheet was a mere agreement to agree to a binding contract.

 Second, the Tribunal’s claim that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements is patently erroneous. It is customary for parties to conduct due diligence after signing the term sheet and before signing the definitive agreements. The very purpose of conducting due diligence is rendered fruitless if parties have already bound themselves to a deal. This does not change despite them being competitors because all the information provided for due diligence is subjected to strict confidentiality and non-disclosure agreements.

Third, it is also not true that without definitive agreements, Zostel had no incentive to comply with the CPs. Contrarily, Zostel may have complied with the CPs to signal its interest and seriousness in the deal to Oyo and consequently, push the deal forward.

GAIL v. Sravanthi – “binding” term sheet found non-binding

In GAIL v. Sravanthi the parties signed a term sheet for supply of natural gas but failed to later convert the term sheet into a more detailed Gas Sale Agreement. The Electricity Appellate Tribunal had to determine whether the term sheet was binding and could form the basis of restrictive trade practises on part of GAIL.

While the court of first instance found that the term sheet was binding, the Appellate Tribunal disagreed with this finding, merely because the term sheet provided that none of the “rights or obligations set out in this Agreement [the term sheet] shall become effective until the date known as CP ‘Satisfaction Date’”. In the Tribunal’s understanding, since the obligations stemming from the term sheet were subject to the performance of the CPs, and those CPs were not performed, the term sheet was not binding. This is despite Clause 31 of the term sheet, which explicitly provided that the term sheet was binding.

Critical analysis

The Tribunal erred on two counts. First, non-performance of CPs should not override the parties’ explicit choice to enter into a binding term sheet since that is the best indicator of intent. Second, non-performance of CPs is no indication of the parties’ intent regarding the binding value of their term sheet since it suffers the problem of circularity. If a party enters into a binding term sheet, it is obligated to act as per its terms, including fulfilling all the CPs. A party should not be able to use its breach of obligation (performance of CPs) to its benefit to argue that there was no obligation at all.

A broader analysis of both cases

In both cases, the Tribunal’s decision was influenced by the prejudice created by the winning party in the mind of the court. In Zostel v. Oyo, this prejudice was created due to the partial performance of obligations by Zostel. Similarly, in GAIL v. Sravanthi the prejudice was created by the inaction of the losing party and perhaps also by the fact that the winning party was a government-owned entity. In sum, the Court engaged in outcome-based reasoning rather than process-based reasoning.

Parties have a property rule entitlement to choose the binding value of the term sheet. They can indicate the same to the other party using clear language in the term sheet. Since term sheets are only preliminary agreements, parties may intend for them to be non-binding. Alternatively, certain deals may be so attractive that parties are willing to be bound at the initial stages as well. In both these cases, parties exercised their entitlement and used explicit language in the term sheet to that effect. However, by not giving deference to the explicit intent of the parties and only relying on the CPs clause, which does not evidence particular intention, the Tribunals effectively converted a property rule entitlement to a liability rule entitlement, just to carve out a role for themselves.

While carving out a role for themselves, the Tribunals have potentially increased transaction costs. These transaction costs manifest in two ways. First, the uncertainty created by the Tribunal not deferring to the will of the parties confounds future actors in the corporate world because they would be unsure of how courts would treat their term sheets. Second, in case of non-binding term sheets, parties may not want to utilise the advantages of a term sheet for the fear that courts may impose its interpretation of commercially reasonable terms for any open terms left for later negotiation.


To avoid these costs, the jurisprudence must evolve to give deference to the explicit intention of the parties. Meanwhile, parties may want to address this issue within their term sheet by adding a clause which provides that performance or non-performance of CPs under the term sheet does not impact the binding nature of the term sheet.


Parties have the entitlement to decide the nature of the term sheet, and they often settle the discussion on the same by incorporating an explicit provision to that effect. Courts should not reinitiate this discussion by looking at the conduct of parties and the performance of the conditions precedent clause since it increases transaction costs.


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