Term Sheets and the “Boilerplate” Fantasy

Joseph W. Bartlett

The classic “boilerplate” in a non-binding term sheet (a/k/a a letter of intent or memorandum of understanding) includes express language that the indicative terms are “non-binding” except for such as the paragraphs on confidentiality, no brokers on either side, and responsibility for expenses. Amongst the provisions ostensibly non-binding one often finds a provision regarding the upcoming definitive agreement(s), which the parties undertake to negotiate in “good faith.” All boilerplate in the eyes of many practitioners.

I am a determined advocate for the proposition that there is no such thing as “boilerplate” if that means language which can be inserted robotically in an agreement, including a term sheet, because the wordsmiths need not waste their time in hyper-analyzing the meaning … just plug in the excerpts from a model form.

But let’s look at the paradigm decision on Delaware law on the question of ‘non-binding’ term sheets, SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A3d 330 (Del. S.Ct. 2013). In that case, the Supreme Court held that SIGA was acting in bad faith when it adamantly insisted (to the point the deal broke down) on terms that were different from those in the term sheet. The Court held that “expectation” damages could be awarded if the trial judge determined that parties would have reached agreement but for the breach. The Court held that in order for such an obligation to be enforceable, Delaware law required an element of bad faith … the “conscious doing of a wrong.” Since the defendant’s position in the negotiations “differed dramatically” from the term sheet and “virtually disregarded” the economic terms, the Court held that expectation damages are reasonable since the record indicated that, but for the breach, the parties would have reached an agreement.

Expectation damages can, of course, be huge and the recommendation in my writings has been to script a clause stating the term sheet is non-binding along the following lines.


The parties expressly agree that no binding obligations will be created until a document entitled “final agreement of purchase and sale’ is executed with the requisite formality and delivered by both parties. Without limiting the generality of the foregoing, it is the parties’ intent that, until the event, no agreement shall exist between them[note specific exceptions] and that there are no obligations whatsoever based on such as parol evidence, extended negotiations, “handshakes,” oral understandings, or courses of conduct (including reliance and changes of position). No legally binding obligations whatsoever, are to be created, implied, or inferred, until a document explicitly entitled, “final,” has been executed and delivered.

In addition, neither part is under any obligation to negotiate in good faith or to use any quantum of effort, including but not limited to “best efforts,” to reach an agreement. Either party is free to negotiate with a third party at the same time it is negotiating with the other party to this document and, except as explicitly herein provided, to solicit interest from any available source. Either party may reveal information, whether labeled “confidential” or otherwise, obtained in the course of the transaction unless there is a specific agreement, signed by both parties with the requisite formality, to keep a particular item of information confidential.

The lesson. If you are going to agree the term sheet is non-binding, why not say so, in words all hands will understand. If you want to incorporate a “good faith” obligation, do so with full knowledge of the potential consequences.

2 thoughts on “Term Sheets and the “Boilerplate” Fantasy

  1. For me, the problem is this approach ignores the needs of the investor. As an investor, you’re trying to get from “dating, to going steady, to engaged, and finally married” in a fair and efficient way. Why am I going to spend more time and money (sometimes 7 figures) on a deal where the other side won’t give me any comfort that we’re gradually making a deal we can both live with? If they acted in “bad faith,” they should pay the consequences for it. If they want to run an auction, fine, just be clear about it upfront. If they use the suggested language, they won’t get sued, but they likely won’t get the money either.


    • Hi David,
      Thank you for your comment. The conventional solution is a 30 to 90 day no shop no solicit clause in the term sheet which is expressly binding on the issuer seeking money.


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