Term Sheet vs. Binding Contract: When Does a Commercial Deal Actually Close in Ontario?

Two businesses shake hands on the outline of a deal, put it in writing, and both sides sign. Is that a contract? The honest answer is that it depends entirely on what the document says and how the parties behaved, and getting that wrong is one of the more expensive mistakes in Ontario commercial dealmaking.

A term sheet (sometimes called a memorandum of understanding, or MOU) is meant to summarize the key commercial points of a deal — price, structure, timeline — before the parties invest in full legal drafting. Whether that summary is legally binding, partly binding, or not binding at all is a question of the parties' actual intention, not just the label on the page.

This article explains how Ontario law approaches that question, the signals that push a document one way or the other, and how to draft a term sheet that says exactly what you mean it to say.

What Is a Term Sheet or Memorandum of Understanding?

A term sheet is typically a short document that captures the essential terms both sides have agreed on in principle, often used in business sales, joint ventures, financing rounds, and commercial partnerships. It is usually a stepping stone toward a full agreement, not the final agreement itself. But nothing stops parties from making a term sheet fully binding if that is genuinely what they intend, and nothing automatically makes it non-binding just because it is short or informal.

The Legal Test: Did the Parties Intend to Be Bound?

Ontario courts look at the document and the surrounding conduct as a whole to decide whether the parties intended to create immediate legal obligations, or only intended to record where negotiations currently stood. There is no single phrase that settles this by itself — the whole picture matters, including:

• The specific wording used throughout the document.
• Whether all the essential terms of the deal are actually spelled out, or whether important pieces are left for future agreement.
• Whether the parties proceeded to act as though a deal already existed — for example, one side started performing, paying deposits, or giving up other opportunities.
• Whether the document contemplates a further, more formal agreement still being negotiated and signed.

Signals That Point Toward Binding vs. Non-Binding

No single row in this table is decisive on its own — courts weigh the document and conduct together.

Provisions That Are Often Binding Even Inside a "Non-Binding" Term Sheet

Businesses are frequently surprised to learn that a term sheet can be non-binding overall while specific clauses inside it are fully enforceable. It is common practice to expressly carve out certain provisions as binding regardless of whether the rest of the deal closes, such as:

• Confidentiality obligations over information exchanged during negotiations.
• Exclusivity or "no-shop" commitments not to negotiate with other parties for a period.
• Cost allocation for who pays legal and advisory fees if the deal falls apart.
• Governing law and dispute resolution for any disputes arising out of the negotiation itself.

If a term sheet does not clearly separate these "always binding" provisions from the rest, disputes over what was actually agreed become far more likely.

What Happens If You Walk Away After Signing a Term Sheet?

Walking away from a genuinely non-binding term sheet is generally not a breach of contract, because there was no contract to breach — though it can still expose you to claims under any binding carve-out provisions, such as confidentiality, exclusivity, or cost-sharing, that survive regardless of the deal falling through. Walking away from a document a court later decides was actually binding is a different story entirely, and can expose you to a claim for damages. Because the line between the two outcomes depends on wording and conduct, it is worth getting legal input before either signing a term sheet or deciding to abandon one.

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