Paper Promises: How 'Non-Binding' Term Sheets Still Bind You

The letter of intent is the deal world's most misunderstood document. Executives sign them with a shrug, comforted by a single phrase — "non-binding" — that they believe functions like a force field. It does not. Courts across the United States routinely enforce specific provisions of LOIs, memoranda of understanding, and "agreements in principle" while disregarding the label the parties attached. The result: preliminary documents that were supposed to be conversation starters become litigation exhibits.

The Illusion of the Label

"Non-binding" is not a legal inoculation. It is a descriptor that only matters to the extent the drafters did their work elsewhere in the document. The binding portions of an LOI typically hide in three places: exclusivity provisions, confidentiality undertakings, and covenants to negotiate in good faith. Each carries real consequences.

Consider exclusivity. A 60-day no-shop clause prevents the seller from soliciting — or even entertaining — other offers during the negotiation window. Break it, and the buyer may seek injunctive relief or damages, even if the underlying deal never closes. Sellers who treat the exclusivity period as a free option to keep shopping have learned, painfully, that it is neither free nor an option.

Confidentiality terms in LOIs are routinely enforceable as standalone contracts. Disclosing sensitive information before the NDA is signed, or assuming the LOI's confidentiality clause covers only the deal terms rather than the diligence materials exchanged under it, are common and costly drafting errors.

Good-faith negotiation covenants are the most treacherous. Courts in several jurisdictions, New York and Delaware among them, have grappled with whether a party can be liable for walking away from a deal in bad faith. The answer is often yes — where the record shows one party used the negotiation process to extract information, stall a competitor, or string along a counterparty with no intention of closing.

When Term Sheets Cost Millions

The case law offers a gallery of cautionary tales. In one well-known line of decisions, courts awarded damages where a buyer's conduct during exclusivity — demanding repeated concessions while secretly pursuing the same assets elsewhere — breached an enforceable duty to negotiate honestly. In other disputes, sellers have been enjoined from selling to third parties after violating no-shop provisions, watching their alternative transactions evaporate while the original buyer renegotiated from a position of strength.

The pattern is consistent: the parties focused so heavily on price and structure that they skimmed the operative clauses. By the time lawyers read them closely, a dispute already existed.

A Clause-by-Clause Review Discipline

Before anyone signs a term sheet, a disciplined review should cover, at minimum:

• The binding provisions list. A well-drafted LOI expressly enumerates which sections bind. If that list is missing or vague, assume the ambiguity will be resolved against the drafter.
• Exclusivity scope and duration. Who is restricted, from what activities, for how long, and are there carve-outs for unsolicited approaches?
• Confidentiality reach. Does it cover only the LOI's terms, or all diligence information? What is the survival period?
• Expense allocation. Who bears transaction costs if the deal dies? Break-up fees, whether payable or receivable, should be identified explicitly.
• Governing law and dispute resolution. Preliminary documents are litigated too. Choose the forum deliberately.
• Publicity restrictions. Announcements about a pending deal can themselves trigger liability if made without consent.

Drafting With Intent, Not Hope

The fix is straightforward but requires abandoning the assumption that LOIs are informalities. State clearly which provisions bind and which do not. Avoid moral language — "the parties will act reasonably" — unless you intend it to be enforceable. Resist boilerplate imported from the definitive agreement, because a court may treat its presence as evidence of intent to be bound.

Most importantly, match the document to the business reality. If you genuinely want freedom to walk, draft language that preserves it. If you are asking a counterparty to stop shopping, acknowledge that you are asking for something of value — and expect to pay for it, contractually or in negotiating goodwill.

The letter of intent sets the tone for the entire transaction. Treat it as the first contract you will be judged by, not the last formality before the real one. Clear counsel at the term-sheet stage is the cheapest legal work a deal will ever require.