In business, negotiations play a crucial role in reaching agreements. A term sheet is a commonly used tool in this process. It is a document that sets out the most important conditions of a future agreement. What legal significance does a term sheet have? And what happens if one of the parties decides to break off negotiations? In a ruling by the Amsterdam District Court the judge considered these questions.

Facts

A intermediary in mortgages and insurance, among other things, enters into a partnership with a utility company. As part of the collaboration, the parties draw up a term sheet in which they set out in detail how they intend to structure their collaboration. At a certain point, the utility company breaks off the negotiations. The intermediary goes to court and argues that the utility company is guilty of breach of contract or unjustified termination of negotiations. By signing the term sheet, the intermediary had justifiably relied on the fact that a cooperation agreement would be reached between the parties. The intermediary claims damages for lost profits and costs incurred. The parties differ in their opinions on the significance of the signed term sheet and whether or not the negotiations could be legitimately broken off.

The courts’ verdict

The judge rules that a term sheet is ‘a summary of the main points that the parties intend to include in the final (cooperation) agreement to be concluded’. In principle, a term sheet does not create an enforceable obligation to achieve a specific result in the form of actually entering into a collaboration, but merely leads to a best-efforts obligation to try to achieve a collaboration. After all, the term sheet only contains a summary of the main points of what the parties intended with their collaboration. The judge emphasised that a term sheet is generally intended to confirm the parties' intentions and to provide direction for further negotiations. In the present case, therefore, according to the judge, there is insufficient evidence to assume an imputable shortcoming. The intermediary’s claims for damages cannot therefore be allowed on this basis.

With regard to the question of whether the utility company legitimately broke off the negotiations, the judge considered the following: ‘the term sheet and accompanying business plan contain a detailed description of the intended collaboration‘. The content of the term sheet and the business plan showed that an important point for the parties' collaboration was to place the responsibility for Wft compliance with the intermediary, as the latter already had its own Wft licence and had experience with intermediary activities.

After investigation of the utility company, it appeared that the proposed collaboration construction presented risks in the sense of the Wft. After all, the construction led to the utility company being qualified as an intermediary (art. 1:1 Wft), as a result of which it would be subject to licensing according to the Wft. The judge ruled that: ‘the changes necessary to bring the services to be provided in the collaboration into compliance with the requirements of the Wft were, in view of the above, such that the intermediary could not assume that the utility company would agree to them‘. This means that the intermediary cannot invoke legitimate expectations regarding the realisation of the agreement. Moreover, the utility company did not behave in negotiations in a way that violated the requirements of reasonableness and fairness. There is therefore no basis for liability for damages. The judge rejects the claims of the intermediary.

You can read the full judgement here.

Conclusion

A term sheet is a useful tool in negotiations, but does not offer absolute certainty that an agreement will be reached. When drawing up a term sheet, parties would be well advised to clearly define which parts are binding and which are not. In addition, caution is advised when breaking off negotiations, as carelessness can lead to liability. A good understanding of the legal implications helps to limit risks and conduct negotiations in a responsible manner.

Would you like to know more or do you have questions or need advice about the legal implications of a term sheet and/or (aborted) negotiations? The team at SPEE advocaten & mediation will be happy to help you.