not want to outsource its training services to NotSubject or, indeed, at all.
Fortunately for NotSubject, the termsheet was silent on the point of whether or not it was intended to be legally binding. There is a body of law on this topic but as a broad rule, a document that appears to be setting out a commercial agreement between two parties (both of whom have signed it) will generally be held to be binding. The software company was in fact stuck with a binding arrangement it did not want. It is usual in termsheets to insert specific language such as ‘this termsheet is not intended to be legally binding’, and then specifically to highlight any terms (such as confidentiality or exclusivity) that the parties do intend to have legal effect.
Phrases such as ‘subject to contract’ or ‘subject to further documentation’ are often used to try and achieve the same effect, but these are less clear and can depend on context. A termsheet being expressed to be ‘subject to contract’ may create a presumption that the parties anticipate further definitive documents, but it does not necessarily mean that the terms in the termsheet are not binding. It would be open to a court to decide that some or all of the terms were intended to have contractual force. In short, there is no substitute for clarity at the outset.
Conclusion
Used correctly, a termsheet can be extremely useful in the process of doing a deal. Both sides should look to have their dealbreakers brought up and agreed at this stage, and ensure that the termsheet covers all of
them. Though termsheets are an indication of serious intent or moral commitment, they will typically not require the parties to deal on its terms, if at all. However, a well-drafted termsheet that addresses the correct areas will reduce the risk of both parties getting some way down the line and then discovering that there is no deal to be done, and by eliminating certain issues from the negotiation of the definitive documents it can save both sides considerable time and expense.
The traps for the unwary, with this particular cog,
lie at both ends of the scale – a
termsheet that is too high-level will not save any effort at all, whereas one that is too detailed will inevitably lead to cost and delay. Entrepreneurs should consider before the process begins what they wish to see covered in the termsheet, and during discussions with their counterparty and their advisers should bear in mind that an agreement in principle is what counts at this stage – the detail should come later, and it should be clear from the language of that termsheet that other points may arise subsequently provided that they do not counter any of the key terms agreed on the termsheet.
David Willbe is a lawyer in the Corporate Group, in the London office of Crowell & Moring, an international law firm.
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