The words “non-binding” at the top of a term sheet do less work than most dealmakers assume. Courts read the whole document, watch what the parties did after signing, and decide for themselves what got promised. By the time a judge is looking at it, the label is one factor among several, and rarely the strongest. Deals that were supposed to end with a clean walk-away right end instead with damages, injunctions, and a fight over what the signers meant.
Term sheets and letters of intent produce a strange amount of litigation for documents everyone insists are optional.
The reason is that the assumptions people carry into signing them are mostly wrong. Here are some of them below:
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The “Non-Binding” Label Controls the Outcome
A header that reads “Non-Binding” is evidence of intent. It is not a force field. Judges look past the label to the operative language, the structure of the document, and the conduct that followed.
If the parties acted as though a deal existed, that behavior gets weighed. Guidance from the Association of Corporate Counsel walks through how term sheets and LOIs, even when labeled non-binding, routinely produce disputes over exclusivity, confidentiality, expense allocation, and standstill terms that were meant to survive the walk-away.
The result is a document that is partly binding and partly not, with the split decided later by a court reading tea leaves. When that reading goes against you, the litigation costs dwarf whatever the drafting shortcut saved. Firms that handle these fights, including commercial litigation attorneys, spend a meaningful share of their docket cleaning up preliminary agreements the signers swore were harmless.
A Term Sheet Can’t Force You to Keep Talking
It can. A well-recognized line of cases treats certain preliminary agreements as creating an enforceable duty to negotiate the open points in good faith, even when the final contract never gets signed. Walking away for a reason that has nothing to do with the deal, or holding out for terms the preliminary document already resolved, is where liability attaches.
How this plays out depends on where the dispute lands. Federal courts in one influential circuit have long recognized a two-track framework for preliminary contracts. Some state high courts have rejected that split and instead ask whether the parties treated later agreements as a precondition to performance. Either way, “we hadn’t signed the real contract yet” is not the universal defense signers assume it is.
Only the Whole Document Binds, or None of It Does
Term sheets almost always mix binding and non-binding provisions inside the same signature block. The commercial terms sit up top and are aspirational. The procedural terms sit at the bottom and are frequently enforceable on their own terms.
- Exclusivity. A no-shop period keeps the seller off the market for a stretch of weeks. Breach it by taking a call from another bidder and the buyer has a real claim.
- Confidentiality. Information shared under the LOI stays covered even if the deal dies. Using it to compete later is its own cause of action.
- Expense allocation. Break-up fees, reimbursement of diligence costs, and who eats the banker bill are usually meant to bind on signing.
- Governing law and forum. The dispute-resolution provisions apply to the term sheet itself, not just the deal that never happened.
Silence on Open Terms Kills Enforceability
Missing terms help the party arguing there was no deal; they do not decide the question. Courts look at whether the truly material terms were nailed down, whether one side started performing, and whether the parties themselves treated the document as final on the points it covered.
Partial performance is where preliminary documents most often calcify into binding ones. Once money changes hands, integration begins, employees get transitioned, or a party stops chasing alternatives in reliance on the deal, the argument that nothing was agreed becomes harder to make with a straight face. Conduct fills in what the paper left open.
Draft Like the Deal Might Fall Apart
The version of the term sheet that survives a dispute is the one written by someone who assumed a dispute was coming. Say expressly which sections bind and which do not. Put the non-binding disclaimer inside the sections it applies to, not only in the header.
Define what “good faith negotiation” means in the document itself, and set a hard sunset date after which the preliminary obligations expire. Reserve the right to walk away for any reason or no reason, in the sections where that is what you want.
None of this is unusual drafting. It is the difference between a document that closes the loop and one that opens a courtroom.
