ADITYA GANDHI AND SIDDHARTH SHARMA, FOURTH- YEAR STUDENT AT NLUO, ORISSA

INTRODUCTION

Term Sheets are preliminary agreements executed at the first stage of complex commercial transactions between companies and prospective investors. These agreements outline the deal structure and cover the material terms and conditions of an investment. They largely serve as non-binding agreements to direct negotiations between the investors and the target. While the core commercial terms in a term sheet are intended to be non-binding, virtually all term sheets contain certain clauses like exclusivity and confidentiality, that are binding and legally enforceable. This creates an uncertainty as to whether a “non-binding” term sheet could crystallize into a set of binding rights and obligations.

In this context, the recent Delhi High Court (‘Delhi HC’) judgement in Oravel Stays Private Limited v. Zostel Hospitality Private Limited has highlighted the question regarding the legal enforceability of term sheets. The Delhi HC quashed the arbitral award that held the term sheet signed between Oyo and Zostel to be binding in Zostel’s favour. The dispute, spanning nearly a decade, seems to have concluded with Zostel withdrawing their special leave petition before the Supreme Court in July 2025.

In light of this judgement, the article aims to map out the impact that the Delhi HC judgement will have on the status of term sheets. The authors explore the key difference in the rationale of the aforementioned judgement and the arbitral award.

FACTUAL BACKGROUND

This dispute stemmed from a proposed acquisition that fell through. Oyo and Zostel had executed a term sheet in 2015, where Oyo offered to purchase certain assets from Zostel. In line with the conventional approach, the term sheet’s preamble mentioned that it was non-binding and subject to definitive agreements. The proposed acquisition did not materialise after differences emerged between the parties before definitive agreements could be signed. Zostel claimed it had completed its obligations under the term sheet and sought for the specific performance of reciprocal obligations. Oyo contended that without any definitive agreements, it had no obligations towards Zostel as the term sheet was non-binding.

THE ARBITRAL AWARD IN FAVOUR OF TERM SHEET ENFORCEABILITY

The Arbitral Tribunal held that the term sheet had become binding due to the conduct of the parties. It observed that Zostel’s performance of its obligations under the term sheet gave them a legitimate expectation from Oyo to fulfil reciprocal obligations. The Tribunal further observed that Oyo’s communications to Zostel indicated that the parties were acting upon the term sheet. The Tribunal further held that the transaction envisaged in the term sheet was not consummated due to Zostel’s performance of their obligations; and there was no consensus ad idem between the parties. However, the Tribunal stopped short of granting the relief of specific performance to Zostel. Instead, it held that Zostel was entitled to bring a claim for specific performance of the term sheet in the absence of any definitive agreements.

The Tribunal’s award marked a significant deviation from the standard legal position on the enforceability of term sheets. This approach by the Tribunal considered the actual intent and performance of the parties over mere contractual terminology. To put things into perspective, Oyo had acquired control over the business assets of Zostel after singing the term sheet. Further, the Tribunal observed that Zostel had satisfied all the conditions laid out in the ‘closing’ clause of the Term Sheet; and that the closing of the transaction (Oyo acquiring Zostel) was the only outcome after compliance with the stipulated conditions. Following this reasoning, the Tribunal held that the Term Sheet had become a binding document due to the actions of the parties.

THE DELHI HC RULING

The Delhi HC set aside the arbitral award rendered in favour of Zostel for being inconsistent with the public policy of India. The Court observed that the conclusions drawn in the award were at odds with the express language of the term sheet, wherein it stated that it is non-binding except for five specifically delineated clauses. It noted that had it been the intention of the parties that all the provisions of the term sheet be made binding, there would have been no occasion to incorporate an express stipulation to the contrary.

The Court placed reliance on the Karnataka High Court judgement in Azeem Infinite Dwelling v. Patel Engineering Ltd. (‘Azeem Infinite’), which held that term sheets cannot be considered as binding agreements if they require the execution of definite agreements. It underscored that the term sheet was a preliminary document, the binding nature of which was subject to the execution of definitive agreements pertaining to its subject matter. It further observed that the arbitral tribunal did not hold that any implied term must be read into the term sheet to render it binding; rather, it anchored its finding of the binding nature of the term sheet on the conduct of the parties.

The court’s view supported the strict interpretation of contractual terms, holding that the intention of the parties must be ascertained from the words used and not from the subsequent conduct of the parties. The Court also remarked that the award itself acknowledged the absence of definitive agreements, which was attributed to unresolved issues with a minority investor. There was no consensus ad idem between the parties, since the definitive agreements as envisaged under the term sheet were never executed.

The Delhi HC also emphasised on the nature of a term sheet as a determinable contract; i.e. a contract whose outcome can be decided unilaterally by the ‘sweet will’ of one party without assigning any reasons for the same. This observation of term sheets being determinable contracts further weakens the case for their enforceability, emphasising that they are usually non-binding unless explicitly mentioned otherwise.

INTERPRETATION UNDER CONTRACT LAW

For any agreement to constitute a binding contract, the intention of the parties to create legally binding relations becomes the primary consideration. Indian courts have inferred the intention of parties not just through express written terms of the agreement, but also through their conduct. The Supreme Court (‘SC’) in Transmission Corpn. of Andhra Pradesh Ltd. v. GMR Vemagiri Power Generation Ltd. held that the conduct of parties, along with the surrounding facts, is relevant in determining if a binding agreement exists in the absence of express written terms. In this dispute, the Tribunal went a step further by holding the term sheet to be binding due to the conduct of parties, despite the preamble clearly stating otherwise.

Though the Delhi HC found the Tribunal’s reliance on conduct to be precarious, it stopped short of going into the merits of the Award. The SC’s judgement in Bank of India v. K Mohandas, where it observed that contracts must be interpreted from their text, and not subsequent conduct of parties, offers support to the Delhi HC’s concerns. There is a clear conflict with regards to whether subsequent conduct should be considered to decide whether an agreement is binding. The precedent in Azeem Infinite supports the premise that term sheets requiring execution of definitive agreements are not binding. That said , there isn’t any definitive precedent on this issue. As a result, there still remains a sufficient legal basis for term sheets to be held binding in future decisions.

Ultimately, the conflict between strict textual interpretation against reliance on subsequent conduct of the parties to infer a binding contract creates uncertainty for parties. The inconsistent precedents on this issue leave a significant ambiguity as to if, and when a term sheet becomes binding.

WAY FORWARD

Term sheets show the intention of parties to negotiate and subsequently reach an agreement. They do not represent consensus ad idem between the parties. The Delhi HC’s judgement is likely to become the binding precedent on this issue. However, the Award, backed by previous jurisprudence and no settled position, shows that there still is a possibility of courts holding term sheets to be binding in the future. This dispute has emphasised on the importance of term sheets to be well drafted and watertight to safeguard the interests of the parties.

The buyers must  ensure that they are not held liable for breach of contract if a transaction falls through despite the term sheet being signed. Adding a final confirmation of closing from the buyer to the Closing clause can prevent the buyer from any liability. This adds an extra safeguard, ensuring that the buyer is not held implicitly responsible for breach of contract, especially when a term sheet is not even a binding agreement. A well-drafted termination clause can permit the buyer to terminate if the due diligence findings are unsatisfactory. At the same time, it can also allow the seller to withdraw if they believe the deal won’t conclude. The sellers need to avoid a situation where if a transaction falls through, their performance of obligations under the term sheet should not be rendered meaningless. To prevent this, sellers can seek indemnification in case the transaction does not materialize. This would protect them from the losses incurred from carrying out their obligations under the term sheet.

Apart from the party-led solutions, the courts must also foster a consistent approach when deciding the enforceability of term sheets and other preliminary agreements. The courts should apply a two-tier test to harmonise the conflict between strict textual and contextual interpretations. First, the courts must consider the explicit language in the agreement. If the language designates the agreement as non-binding, a strong presumption against enforceability must be taken. Second, for this presumption to be rebutted, the party seeking enforceability must demonstrate that the parties’ subsequent conduct is overwhelmingly significant. Such conduct must show a clear intention to supersede, and mutually waive the non-binding clause and create a final, binding deal.

Conclusion

The Delhi High Court’s judgement affirms that term sheets, unless categorically stated to be binding, serve as instruments of intent that do not create binding legal obligations. Although conduct like transfer of assets and data sharing may indicate commercial intention of the parties, it does not result in creation of enforceable rights. For commercial intention to attain legal finality, terms of the contract must be express and not implied. This underscores the importance of clear and precise drafting of preliminary agreements where language disclaiming enforceability should be explicit and reiterated throughout. The Delhi HC’s verdict is a key reference point for contractual interpretation of not just term sheets, but all preliminary agreements in commercial disputes. This case also serves valuable lessons to buyers and sellers in drafting term sheets while entering into corporate transactions.