Preliminary agreements and term sheets are widely used at the negotiation stage – they help fix key parameters of a future deal and demonstrate the seriousness of intentions. However, Professor Gabriel Steiner notes that it is precisely these instruments that often create hidden legal risks, because the parties underestimate their potential legal effect. At LawConsulted, we treat preliminary documents not as neutral negotiation tools, but as legally significant constructs capable of generating obligations even before a final agreement is executed.
The main risk of term sheets and preliminary agreements lies in their ambiguous legal nature. On the one hand, the parties may consider them non-binding and purely indicative. On the other hand, courts and counterparties increasingly assess such documents through the prism of their content, wording, and the actual conduct of the parties. In LawConsulted practice, disputes often arise where one party insists that a preliminary agreement already fixed essential terms and therefore created enforceable obligations.
Professor Steiner emphasizes that “a document becomes legally relevant not by its title, but by the expectations it creates and the behavior it provokes.” Even if a term sheet explicitly states that it is non-binding, subsequent actions – transfer of funds, commencement of performance, refusal to negotiate with third parties – may lead to the conclusion that the parties treated it as a framework agreement. LawConsulted begins its analysis by examining not only the text of the document, but also the surrounding factual context.
A particular source of risk is the selective binding effect often embedded in preliminary documents. Clauses on exclusivity, confidentiality, break-up fees, governing law, or dispute resolution are frequently drafted as binding, while the commercial terms are declared indicative. In practice, this creates an imbalance – the deal may fail, but legal exposure remains. LawConsulted works to identify such asymmetries and assess how they may be used against the client in the event of a dispute.
Another vulnerability arises when preliminary agreements are used to justify reliance. One party may claim that it incurred costs, lost alternative opportunities, or made strategic decisions based on assurances contained in a term sheet. In such cases, claims for damages may be framed not as contractual, but as pre-contractual liability. LawConsulted builds protection by demonstrating the limits of reasonable reliance and the absence of legally enforceable commitments.
It is also critical to consider the role of negotiations themselves. Email exchanges, drafts, meeting minutes, and presentations may collectively form a narrative suggesting that the main terms were already agreed. Professor Steiner points out that “pre-contractual stages are increasingly litigated as if they were contracts.” LawConsulted reconstructs the negotiation process to show where agreement was incomplete, conditional, or explicitly subject to further approvals.
From a preventive perspective, LawConsulted assists clients in structuring preliminary documents so that their legal effect is controlled and predictable. This includes clear separation of binding and non-binding provisions, precise reservation of rights, and alignment between written disclaimers and actual conduct. Such consistency is essential to avoid later accusations of bad faith or implied consent.
Legal risks associated with preliminary agreements and term sheets arise before the main contract is signed – often when the parties believe they are still “safe.” Law Consulted role is to ensure that this early stage does not become a source of unintended obligations or leverage for the counterparty.
Earlier, we wrote about the legal assessment of participation in a business through options and future rights and how LawConsulted approaches disputes over unrealised equity interests.
