Terms Sheets - Are they Binding?
We represent organisations and individuals. We have advised organisations on terms sheets. A common question that often arises is whether the term sheet is a binding document? This practice note will address this important question and provide useful practical advice.
Terms sheets are sometimes described as head of terms or heads of agreements. Their purpose is usually to provide an outline of the parties’ intentions and the basis of their collaboration.
As a general rule, in determining whether a terms sheet is binding or not the parties should decide from the outset whether they want it to be fully binding, partially binding or not binding.
FULLY BINDING
If the parties want the entire terms sheet to be binding then the document must expressly state this. An opening paragraph stating that the contents of the terms sheet is intended to be binding in full will be adequate.
Silence on the part of the document will cause uncertainty. It is therefore always important that the terms sheet is drafted by an expert.
PARTIALLY BINDING
The most common form of a terms sheet is a partially binding one. This is where the parties appreciate that some terms are fluid while others are expected to be honoured at all times and therefore are binding from the outset. Examples of binding terms are those relating to confidentiality, lock out provisions, limitation of liability during negotiations, legal fees etc.
NON-BINDING
Non-binding term sheets are often found in non- contentious property transactions. For example if a sports club was negotiating a licence agreement with a concession stand provider then such term sheets are entered into in order to provide guidance to the respective parties legal advisors on the terms to be incorporated into the licence agreement.
The recent case of New Media Holding LLC v Kuznetsov 2016 EWHC 360 shows that if a terms sheet is sufficiently certain and all the other elements necessary for a valid contract are present, it may be enforceable. If the parties do not intend that the terms sheet to be fully binding or not binding at all it is important that it clearly states this. For example the words “Subject to Contract” are an indicator that the parties do not intend to be bound by the document until a formal agreement is entered into,
EXPIRY
The expiry of a the terms sheet can provide difficulties if the parties are not clear on what happens after the expiry date and no contract has been entered into. Such uncertainty can cause problems.
In order to avoid such problems the parties should include provisions relating to the consequences of expiry. A straightforward solution would be for the term sheet to state that both parties have the right to extend the term by mutual agreement. This provides contractual cover until a contract is entered into.
In conclusion, whether a terms sheet is binding or not will depend on several factors. The starting point will be terms sheet. If it expressly states that the terms sheet will be fully binding then there is clear intention to create a relation from the outset and that both parties expect the terms are honoured. If the terms sheet states that the terms are ‘SUBJECT TO CONTRACT’ then the intention will be interpreted as that the parties did not intend to be bound by the terms sheet. However, it is often the case that the terms sheet is in between. If the terms sheet is uncertain then it may be for a court or an arbitrator to determine the binding nature.
What is crucial is that in order to avoid uncertainty that the terms sheet is drafted by an expert.