Recently, media outlets released video of President Donald Trump and his own U.S. Trade representative verbally sparring over whether a document labeled a memorandum of understanding could possibly be binding. However, the idea of a businessperson believing a memorandum of understanding (or MOU) to mean one thing and an experienced trade attorney knowing it to mean something else within the context of international trade law is not surprising. Contract labels such as term sheet, letter of intent and MOU are often used casually and interchangeably in the business world with the presumption that such documents represent the mere nonbinding precursor to a more elaborate and detailed written agreement often referred to as the “definitive agreement.” Such a presumption, however, can be dangerous.

A term sheet is generally used to highlight the key business terms of the deal before the preparation of the more comprehensive agreement begins. I like to think of it as a “key points” document. Of course what those key points might be depend on the type of deal it is. For example, in relation to a venture capital investment it ordinarily covers the type of investment being made, the valuation that investment is based upon, the type of securities being acquired and the rights the investor will have with respect to those securities. A term sheet can, and often should, be used as the starting point in any type of business transaction. It can help prevent a situation where the attorneys begin preparing and discussing documentation only to realize that their clients are not in agreement on various fundamental aspects of the deal, such as key business terms. This situation will often lead to higher legal fees for clients as it forces both the drafting and negotiating phases of the transaction to drag on unnecessarily and can lead to further miscommunication and misunderstanding between the parties, which can set the entire relationship off on the wrong foot. The term sheet tends to be prepared in bullet point form and is generally not signed by the parties. In my view, depending on the client’s objectives, it should contain language conspicuously stating that the document is nonbinding under any and all circumstances and that neither party will have any obligations or liabilities to the other should a party elect not to proceed for any reason or no reason.