The Enforceability of Term Sheets: Commercial Division Weighs In

Terms sheets are a staple of sophisticated commercial transactions, memorializing the broad terms of a prospective agreement and setting the groundwork for further negotiations. Term sheets can vary widely in form depending on the nature and scope of the transaction. Critically, term sheets can also vary in their enforceability—some being binding, some nonbinding or some combination of the two. When deals run into trouble, or fall apart completely, litigants will often invoke the term sheet to seek damages sounding in breach of contract and other related causes of action. The Commercial Division of the New York Supreme Court has recently had opportunities to consider such claims and have analyzed when, and to what extent, a term sheet is binding and enforceable. Importantly, while a term sheet may have language that expressly states it is nonbinding, the court’s analysis will not stop there if other language, facts or circumstances suggest otherwise.

Appellate Precedent

While the New York Court of Appeals has not yet expressly addressed the question of the enforceability of term sheets, it has announced important contract law principles applicable to preliminary agreements that inform the lower courts’ decisions. In Kolchins v. Evolution Markets, 31 N.Y.3d 100 (2018), for example, the Court of Appeals set forth the factors a court must consider when determining whether a binding contract exists versus an unenforceable “mere agreement to agree.” In Kolchins, the court primarily relied on its decision in Brown Bros. Electrical Contractors v. Beam Contruction, 41 N.Y.2d 397 (1977) as the “template for deciding a case … where the issue is ‘whether the course of conduct and communications between [the parties have] created a legally enforceable agreement.’” To that end, the court counseled that lower courts must examine the “objective manifestations of the intent” in the parties’ words and deeds and weigh the totality of the circumstances including how the parties were situated and the “objectives they were striving to attain.” In general, the court stated that “while a ‘mere agreement to agree, in which a material term is left for future negotiations, is unenforceable’ … the ‘terms of a contract [do not] need [to] be fixed with absolute certainty’ to give rise to an enforceable agreement.”