A Term Sheet is a non binding document outlining the terms and conditions of a transaction, a contract, or of an offering. A Term Sheet differs from a Letter Of Intent in structure because it enumerates a list of terms while the other is formatted as a letter and because it is merely a draft without legal value for preparation of the parties’ agreement in principle.
When the Term Sheet is signed, marking the parties’ agreement in principle, it guides legal counsel in the preparation of a proposed final document.
Always without being binding, it then guides parties while they negotiate, usually with legal advisor, the terms of the final document.
Even though many authors talk about “binding term sheets” I consider this an aberration.
The word Term Sheet should be considered first as a draft having no legal value but for interpretation of the parties’ hypothetical will, then ending as an agreement in principle.
It should always be treated short from being a letter of intent, even non binding and far from being an offer.
As courts and lawyers in many jurisdictions are following a rule similar to those of Swiss Obligations Code that state:
Article 2 alinea 1 “Where the parties have agreed on all the essential terms, it is presumed that the contract will be binding notwithstanding any reservation on secondary terms.”
Article 2 alinea 2 “In the event of failure to reach agreement on such secondary terms, the court must determine them with due regard to the nature of the transaction.”
Article 2 alinea 3 “The foregoing is subject to the provisions governing the form of contracts.”
Article 18 alinea 1 “When assessing the form and terms of a contract, the true and common intention of the parties must be ascertained without dwelling on any inexact expressions or designations they may have used either in error or by way of disguising the true nature of the agreement.”
One should always be cautious because these rules written in general terms result in any document even incomplete, draft or not executed can recel a commitment.
Therefore the suggestion of article 7 alinea 1 is a good recommendation: “An offeror is not bound by his offer if he has made express declaration to that effect (…)”
So do not forget to mention at the top of your Term Sheet a mention as “Draft Without Commitments”.