Term Sheets in India: Which Clauses Are Binding and Which Are Not

Term sheets are a standard part of investment transactions in India, particularly in the startup and private equity space. They set out the key commercial terms agreed between an investor and a company before the parties proceed to formal documentation. But the legal status of term sheets in India is frequently misunderstood by both founders and investors.

This article explains which provisions in a typical term sheet are legally binding and which are not, and what the consequences are if a party walks away.

The General Position

A term sheet is typically expressed to be non-binding, subject to certain specific provisions. The non-binding nature means that either party can walk away from the transaction before formal documents are signed, without legal liability for the failed deal. This reflects the commercial reality that detailed due diligence and negotiation of final documents may reveal issues that make the transaction unattractive.

However, not all provisions of a term sheet are non-binding. Most term sheets include a set of provisions that are expressly stated to be binding, even though the overall transaction documents have not been signed.

Common Binding Provisions

Exclusivity or no-shop provisions are almost always expressed to be binding. These prevent the company from negotiating with other potential investors for a defined period, typically 30 to 90 days. This gives the investor time to complete due diligence without the risk that the company is simultaneously running a competitive process with other investors.

Confidentiality provisions are also typically binding. The parties agree not to disclose the existence or terms of the proposed transaction to third parties. This is commercially important, particularly where the existence of an investment discussion could affect the company's relationships with customers, employees, or existing investors.

Governing law and jurisdiction provisions are usually binding, to the extent they determine how disputes about the term sheet itself are resolved.

Expense provisions, which allocate responsibility for legal and due diligence costs if the transaction does not proceed, are also sometimes expressed as binding.

What Happens If a Party Walks Away

If either party walks away from a non-binding term sheet, there is generally no legal remedy available to the other side for the failed transaction itself. The investor cannot sue for the return that they would have made on the investment. The company cannot sue for the funding they did not receive.

However, breach of a binding provision, such as the exclusivity clause, can give rise to a damages claim. The measure of damages in such cases is typically the costs incurred in reliance on the exclusivity, rather than the profit that would have been made from the transaction.

There is also a doctrine of promissory estoppel under Indian law that can, in limited circumstances, make a party liable for withdrawing from negotiations if the other party has acted in reasonable reliance on a representation. However, this doctrine is narrow and courts are reluctant to apply it in commercial contexts where sophisticated parties have agreed that terms are non-binding.

Key Points for Founders

Founders should read term sheets carefully before signing. The non-binding nature of the investment terms does not mean the document is without legal consequence. The binding provisions, particularly exclusivity, create real obligations. Founders should also ensure that the term sheet does not inadvertently create a binding obligation to complete the transaction, for example through language committing to a specific timeline or through representations about the company's financial position.

Where a term sheet contains significant binding obligations, founders should take legal advice before signing. The commercial urgency to close a term sheet quickly should not override the need to understand what is being agreed.