Does an agreement in principal on a term sheet amount to a contract?
A number of cases have considered the question whether an agreement in principle on a term sheet amounts to a contract of some sort. For example, assume an investing entity backs out of financing a start-up company. The start-up company claims that the investing entity had made binding legal promises in the term sheet, including particularly the promise to invest money, and should be liable in the event of breach. Generally, the relevant cases have arisen in the context of a lender-creditor relationship; indeed, the cases concerning promises at the preliminary stage are grouped under the general heading of "lender liability," upon which there has been a good deal of commentary. An illustrative case that raises the alarm systems of investor's counsel if Judge Duffy's opinion in Penthouse International Ltd. v. Dominion Federal Savings & Loan Assn. In that case, since reversed by the Court of Appeals, Dominion Federal was held liable to the applicant debtor for $112 million in lost profits for failure to fund its promise to advance a $35 million participation in a loan made by another lender to construct an Atlantic City casino. If one construes the term sheet as equivalent to a lender's commitment letter, then the problems are apparent, including particularly the zany measures of damages that juries award in cases such as Penthouse International and Texaco v. Pennzoil. On the other hand, there may be a recent defendant oriented trend building in reaction to stretches such as Judge Duffy's. Thus, the Seventh Circuit in 1989 held against the notion that a letter of intent is a binding contract, the letter of intent being expressly conditional on acceptance by the boards of both corporations, which in the defendant's case did not occur. The district court made findings that the parties did not intend the letter of intent to be a binding obligation. The court also rejected, again on the specific facts, the allegation that the defendant had failed to negotiate in "good faith."
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