In this blogpost, Nimisha Srivastava, student, Gujrat National Law University, writes about what is a term sheet and the cases related to its enforceability in India.
What is a term sheet
The arrangement of a business exchange, for the most part, begins with agreement upon the terms of business in the type 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. Term sheets are additionally called as ‘letter of intent’ or ‘side letter.’ Essentially, a side letter is a record that is auxiliary to another contract: clearing up, supplementing or changing the first contract. A letter of intent is utilized by the purchasers and merchants as a part of typical to celebrate their agreement on the material terms of exchange, for example, value, closing date, financing, due diligence and other essential arrangement focuses. This is at the transaction stage and aides in getting down to business the last term of the agreement. It is an all around settled guideline of the law of contract that such reports are not binding in nature. The terms of these letters might negative genuine contractual intention. A side letter of nature depicted just forces a commitment to the parties to negotiate in compliance with good faith and nothing more. Be that as it may, every now and again contain binding provisions governing confidentiality and marketing or negotiating exclusivity. A letter of intent, as the name suggests, is composed as a letter though a term sheet is all the more often a rundown of the critical parts of the foreseen contract or agreement.
Jurisprudence
A landmark decision with regard to enforceability of side letters came before the English Courts in the case of Barbudev v. Eurocom Cable Management Bulgaria EOOD and others.[1] The main issue that was sought to be resolved by the claimant was whether a side letter 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. The Court while reading the contract, pointed out that “the court must consider the language used and ascertain what a reasonable person … would have understood the parties to have meant. The court must have regard to all the relevant circumstances and, in a business context; it should prefer the construction that is more consistent with business common sense.” Here the court came to conclusion that the side letter 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 letter 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.
In this particular judgment, the court of appeal put a distinction 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.[2]
This decision will have vital implications in India.
Indian Scenario
If we need to consider the binding nature of such agreements, 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:
- There exists a clear intention to create legal relations.
- That it is not an agreement to agree into an agreement.
- The terms are clear and unambiguous.
- The subject matter is certain.
- There is a flow of consideration.
Under Section 9 of the Specific Relief Act, 1963, particular execution of a legitimately closed contract can be upheld. The offended party who is guaranteeing particular execution of the agreement needs to demonstrate that the conditions for the legitimacy of agreement tried to be upheld are fulfilled.
Any First Party might go into the Agreement with the Other Party and from there on issue the Side Letter upon Other Party for setting up, running and working particular things admissible in law. Both the Agreement and the Side Letter will offer ascent to lawfully enforceable rights and commitments.
That it is superfluous, with reference to whether or not, the Agreement or the Side Letter are registered. For whatever length of time that ownership is not separated with there is no prerequisite for enlistment. No further archive should be executed and/or enrolled between the gatherings the length of a straightforward permit is allowed with no exchange of proprietorship or outright ownership.
Both the Agreement and the Side Letter will be allowable as substantial evidence under the Court of Law. Therefore, it is essential to unmistakably put forward in the letter of intent that there is no commitment to arrange in accordance with some basic honesty and that the letter of intent is not expected to be a binding contract. In most instances, an unsigned term sheet can accomplish the same purpose as a signed letter of intent. To be erring on the side of caution, the unsigned term sheet ought to still incorporate a procurement that there is no commitment to arrange in accordance with some basic honesty and that the term sheet is not a lawfully enforceable contract.
In Kollipara Sriramulu (dead) by L.R. v T. Aswatha Narayana (dead) by L.R[3], it was held that
“Where the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of a further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract, while in the latter there is a binding contract.”
It is necessary to mention in this connection that equity holds people bound by a contract which though deficient in some requirement as to form, is nevertheless an existing contract.[4]
The agreement that is mentioned in the correspondence is not at all fundamental to the contract to sell and was intended merely to be ancillary arrangement for effectuating the sale, and recording the manner and mode of carrying it out.[5]
In another 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.[6]
In P. Panneerselvan v. A. Baylis and Others[7] , the Madras High Court settled a case where the appellant and respondent had entered into an agreement for the sale of land, without reference to the description of land or particulars of value and area of land or time period within which the contract is to be executed. The agreement simply contained a provision that acknowledged the fact that the respondent is willing to sell land for a particular amount. The Court remarked that nature of the contract raised an element of doubt as to the intention of the parties to the agreement. The said agreement was uncertain and void of material particulars. The agreement cannot be said to be a concluded enforceable agreement. On the other hand, in Nanak Builders and Investors Pvt. Ltd. v Vinod Kumar Alag[8] the Delhi High Court held that where the important terms have been agreed upon and reduced into writing, and the agreement makes no mention of another formal agreement to be executed, the Court would not consider the agreement an incomplete agreement. In this case, the parties entered into an agreement to sell. The defendant refused to accept the consideration paid by the plaintiff stating that no contract is in force and the document signed earlier was merely a receipt. Further in Chairman cum Managing Director, Tamil Nadu Tea Plantation Corporation Ltd. v. Srinivasa Timbers[9] , the respondent furnished security amount in furtherance of acceptance of bid. Since there was no formal agreement, Court did not consider acceptance of the as an executed contract and, accordingly, held it unenforceable.
Conclusion
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.
[1] [2012] EWCA Civ 548, 27 April 2012
[2] http://www.allenovery.com/publications/en-gb/Pages/Side-letters-intention-to-create-legal-relations.aspx,
[3] AIR 1968 SC 1028
[4] Subimalchandra Chatterji vs Radhanath Ray AIR 1934 Cal 235
[5] Gostho Behari Sirkar v. Surs’ Estates Ltd. , AIR 1960 Cal 752
[6] Rickmers Verwaltung Gimb H. v. Indian Oil Corporation Ltd., (1999)1 SCC 1
[7] AIR 1986 Mad 284
[8] AIR 1993 Delhi 315
[9] 1999 (1) CTC 436
