Is a term sheet a contract?

This case¹ considered whether a term sheet constituted a contract.

The claimants were a hedge fund and an investment manager. The defendants were the CEO and deputy CEO of a French company. The claimants contended that, by a funding agreement made in July 2007, the hedge fund agreed to provide an advance of $30M to the defendants to assist them to complete funding of a private placement of securities of the French company. The investment manager was to be paid a fee for arranging the funding.

The claimants contended that the terms of the funding agreement were set out in a term sheet that was signed by the claimants and the defendants.

The scheme involved the funding provided by the hedge fund to be used to finance the purchase of warrants in the French company. The warrants were then to be transferred to an SPV to be established by the defendants, and were to stand as security for repayment of the advance. The defendants agreed, among other things, that:

• they would place other securities in the SPV by way of further collateral for the advance; and
• the hedge fund would be repaid the amount of the advance within one year from the funding date.

The advance was made and the private placement was successful. However, the defendants never established a SPV, and the hedge fund was never repaid. The hedge fund instead received the warrants, which had reduced in value.

The claimants alleged that the defendants were in breach of the funding agreement and claimed money due under it and damages.

The defendants denied that they had concluded any effective and enforceable contractual agreement with the claimants and, in particular, that there was no intention to create legal relations.

The defendants argued that they had merely signed a non-contractual commitment to continue negotiations and that they had expected after the term sheet was signed that there would be further discussions and lawyers would be instructed to draw up a legally binding contract.

The judge noted that, in deciding whether parties had entered into a contract, the courts normally applied an objective test: "how would a reasonable man versed in business have understood the exchanges between the parties?".

The court noted the following:

• The parties recognised that their agreement would later be incorporated into a formal document, and they expected that the terms of their commitment should be defined in more detail. This was not inconsistent with the parties having evinced an intention to be legally bound.

• There is no general rule that term sheets are, or are not, of contractual effect, and their status could be determined only by the nature of the particular document and the facts of the particular case.

• The judge held that the wording and presentation of the term sheet were such to evince an intention on the part of the parties signing it to enter into a contractual commitment.

• The judge noted that each page of the term sheet carried a footer that "the terms included are intended to create a binding obligation on the part of the Borrowers, the management and their affiliates". The judge stated that the argument that the parties evinced an intention to be bound did not depend on the footers. He held that it was demonstrated by the words under which the parties signed: "Please sign to acknowledge agreement and acceptance of the terms of the transaction".

The court concluded that, on an objective assessment, the parties to the term sheet evinced an intention to be bound contractually by its terms.

¹ Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] EWHC 257 (Comm)

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