That is the question addressed in Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 894 N.Y.S.2d 47 (N.Y. App. Div. 1st Dep’t Feb. 4, 2010).

Amcan Holdings, Inc. (“Amcan”), certain of Amcan’s affiliates (together with Amcan, collectively, “Borrower”), and Canadian Imperial Bank of Commerce (“Lender”) negotiated, executed and delivered a certain “Summary of Terms and Conditions” (the “Term Sheet”). The Term Sheet contained a variety of agreed upon terms and conditions, including the principal amounts of the revolving and term facilities, interest and amortization schedules, maturity dates, fees, the collateral to secure the debt, and a proposed closing date. 

After discovering that Borrower was subject to a preliminary injunction that prohibited Borrower from pledging to Lender certain equity interests, Lender lost interest in the proposed financing arrangement. Six years later, Borrower initiated a breach of contract action against Lender. Borrower’s position was that the Term Sheet was a binding commitment to lend.

The New York appellate court disagreed. The court stated that the fundamental issue to be determined in these cases is whether the parties intended to be bound by the agreed upon terms and conditions set forth in the preliminary agreement (i.e., the Term Sheet). To support its conclusion that the Term Sheet was not binding, the court noted that the Term Sheet clearly states “the credit facilities will only be established upon completion of definitive loan documentation, which would contain not only the terms and conditions in those documents but also such other terms and conditions as [Lender] may reasonably require. Although the [Term Sheet] was detailed in its terms, it was clearly dependent on a future definitive agreement, including a credit agreement. At no point did the parties explicitly state that they intended to be bound by the [Term Sheet] pending the final Credit Agreement, nor did they waive the finalization of such agreement.”    

Based upon this case, a prudent lender should make it clear within the term sheet which provisions, if any, are binding upon the parties. Additionally, the term sheet should indicate that the proposed credit facilities shall not be established, and lender shall not be committed to lend, unless and until the parties execute and deliver definitive loan documentation.