You’ve signed a term sheet, circumstances have changed, and now you’re trying to walk away. After all, the term sheet says it’s “non-binding,” right? So you’re free and clear? Not always.

This is a question we get all the time from founders in our practice.

We’ve seen founders and investors assume that a “non-binding” label is a get-out-of-deal-free card. But the reality is more nuanced; and sometimes, the very language in the term sheet can unintentionally lock you into obligations. A deal you thought you could abandon might still come back to haunt you.

Even if your term sheet includes a standard “non-binding” clause, the wording elsewhere might create binding consequences. Courts have found that even language considered boilerplate (such as a promise to negotiate “in good faith”) can trigger enforceable duties. And once that happens, you could be liable for failing to follow through.

While that’s not true in every state, it is the case in Delaware, where most of the term sheets we review are governed. So, when is a “non-binding” term sheet enforceable? In short, when all the typical elements of a contract are present, conduct that signals intent to be bound, or when the parties (intentionally or not) speak or act in ways that imply commitment. Another factor is whether the agreement appears “complete” — if it looks and reads like a finished deal, a court might treat it as one.

Delaware Law and the Two Types of Preliminary Agreements

Delaware, like New York, federal courts, and other jurisdictions, recognizes two types of enforceable preliminary agreements:

- Type I agreements are fully binding. They reflect agreement on all essential terms, even if the parties expect to formalize things later. Type I agreements exist where the parties have reached a consensus “on all the points that require negotiation” and merely plan to memorialize the deal in a more formal document. Courts view these as “preliminary only in form”, since the essential terms are settled, and the second-stage contract is just a formality. Stated differently, Type I agreements are created when the parties agree on all points (including whether to be bound) but delay final documentation for convenience or polish. Once formed, they obligate the parties to proceed with the deal, even if the final version is never signed. In a financing context, it’s rare to see a term sheet that qualifies as a Type I agreement, but it’s not impossible — especially where the term sheet is detailed and the parties’ conduct suggests they’ve already begun acting as if a deal is done.

- Type II agreements are binding to a certain degree. The parties agree to negotiate in good faith based on settled terms, even if some deal points remain unresolved. A Type II preliminary agreement does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed framework. It doesn’t guarantee a final contract, but it does bar one side from walking away altogether or demanding radically different terms. Courts have repeatedly enforced this duty (even without an express clause) where the record shows an implied promise to negotiate sincerely. In other words, while good faith disagreements can kill a final deal, abandoning talks entirely or acting inconsistently with the agreed roadmap can expose you to liability. To avoid accidentally committing to this obligation, it’s not enough to just say the term sheet is non-binding. Ideally, you should also include an express disclaimer of any duty to negotiate in good faith, because unless you say otherwise, courts may imply it.

SIGA v. PharmAthene: A Wake-Up Call

The Delaware Supreme Court’s decisions in the SIGA Technologies cases show how things can go wrong. In SIGA, the parties had agreed to negotiate in good faith based on a non-binding license agreement term sheet (the “LATS”). Even though each page of the LATS was marked “Non-Binding Terms,” the court still held SIGA liable when it walked back its earlier commitments and attempted to negotiate drastically more favorable terms.

The court found that SIGA had entered into a Type II agreement, and that its failure to negotiate in good faith (i.e., consistent with the term sheet) was a breach. Because the trial court found that the parties would have reached a definitive agreement but for SIGA’s bad faith, the Delaware Supreme Court held that expectation damages (i.e., lost profits) were appropriate. That’s a steep consequence for what many would have considered a preliminary framework.

That said, the SIGA decision leaves room for nuance. The Delaware Supreme Court didn’t spell out a rigid formula for when expectation damages should apply. Instead, future courts are likely to weigh factors such as how willful the breach was, how many key terms were already negotiated, and how uncertain the potential profits actually were.

Cox v. T-Mobile: Another Cautionary Tale

The Delaware Supreme Court recently reaffirmed this approach in Cox Communications v. T-Mobile. There, Cox agreed to enter into a future agreement on terms to be “mutually agreed upon,” but left many key details open. The court still found that the parties had entered into a Type II preliminary agreement, which obligated them to negotiate in good faith within the agreed framework, even though a final contract wasn’t guaranteed.

The decision highlighted that even vague or flexible wording, when paired with context suggesting mutual commitment, can create enforceable duties. So even when parties leave terms open for later discussion, they may still be legally required to negotiate seriously and consistently with earlier discussions.

The Surprise No One Wants

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Imagine being forced to keep negotiating just because you used the phrase “will negotiate in good faith.” Or worse, imagine being sued for expectation damages because a court decides you walked away from a Type II agreement. These aren’t just theoretical risks, they’ve happened.

So, what can you do to prevent a term sheet from becoming unintentionally binding? It’s a hazy line between a helpful term sheet and an unintended binding agreement. Here are some practical tips to reduce the risk:

- Make clear that the document summarizes discussions only and does not reflect a final offer or commitment.

- Expressly Exclude Binding Effect.

- Define Exceptions Narrowly: If parts of the term sheet (e.g., confidentiality, exclusivity) are binding, list them explicitly — and only them.

- Include a “No Obligation to Negotiate” Clause.

- State that the term sheet is not, and will not be construed as, a Type II preliminary agreement.

- Make it clear that either party can stop discussions at any time, for any reason, without liability.

- Disclaimer of Reliance.

- Condition Final Deal on Definitive Agreements,

- Use language like “intends,” “may,” or “proposed” — not “shall,” “agrees,” or “will” — to avoid suggesting commitment.

If your goal is to preserve flexibility and walk away if needed, clarity is essential. Conversely, if you want to lock in a roadmap and good faith duty to negotiate, make that intent equally clear.

If you’re worried about unintended obligations, keep this in mind: a term sheet that’s too detailed and final in tone could be viewed as a contract in disguise. Leaving some minor issues open can support the argument that no binding deal was intended.

Suggested Clause:
If you want to bulletproof your term sheet, consider including something like this:

Non-Binding Effect

This Term Sheet is intended solely as a summary of certain key terms currently under discussion between the parties and is provided for convenience and reference purposes only. Except for the provisions expressly designated as binding — specifically, the sections entitled [list here [prorvision such as Confidentiality or Exclusivity] — this Term Sheet does not constitute a legally binding obligation or commitment by any party with respect to the proposed transaction. The parties understand and agree that this Term Sheet does not represent, and shall not be construed as, an agreement to negotiate in good faith, a Type II preliminary agreement, or any other agreement that imposes binding or enforceable obligations regarding the subject matter herein. No rights, obligations, or liabilities of any kind shall arise in connection with this Term Sheet, whether by implication, course of dealing, or otherwise, except as expressly set forth in the binding provisions identified above. Each party is free to discontinue discussions or negotiations at any time, with or without cause and without liability or obligation to the other. Final consummation of the proposed transaction is subject in all respects to the negotiation, execution, and delivery of mutually acceptable definitive agreements, and the satisfaction of all applicable conditions, including internal approvals and any necessary legal or regulatory consents. Each party further acknowledges that it is not relying on any statements, representations, or promises not expressly set forth in the binding provisions of this Term Sheet.