Brief Overview:

Term sheet containing an arbitration clause constitutes a valid arbitration agreement when the parties have acted upon the term sheet although definitive agreements were never executed.

Technical Details:      

Whether disputes under a term sheet containing an arbitration clause, which contemplated execution of further definitive agreements, can be referred to arbitration even when such agreements were never executed?

The Bombay High Court answered in affirmative and observed that:

1) A term sheet is not merely the terms of future agreement to be executed.

2) Where one of the parties had acted on the term sheet and made investments, the intention of the parties was clear from the arbitration clause – disputes arising from the term sheet were to be referred to arbitration.

3) Relying on the ‘veritable party’ doctrine, the reference to arbitration was also extended to non-signatories to the term sheet who had actively participated in negotiation, implementation and performance of the transaction.

Takeaways:

This judgment serves as a reminder that term sheets are not preliminary non-binding documents and once acted-upon, they may give rise to binding obligations and even an arbitration agreement. A word of caution for non-signatories who actively participate in negotiation, performance, and implementation of transactions – one may be roped in arbitration, and no signature would be no escape.

For further details, please see:

Urban Infrastructure Trustees Ltd. v. Bhavik Bhimjiyani and Others

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