The Term Sheet: What Is It and How Do We Use It?

By

Sarah Klahn,* David Belcher,** and Berton Lee Lamb

We often encounter “term sheets” in multi-party negotiations. Recently, we were involved in a negotiation that was going pretty well. The parties had agreed on a few things and seemed to trust one another. During a session, one of the attorneys suggested, “We seem to be making good progress. What would everyone think if we tried to develop a term sheet?” The attorneys in the room brightened up, but the other professionals looked puzzled. The discussion that followed made it clear that we needed to define our terms: What is a term sheet?

A term sheet is a written list of concepts, positions, or outcomes that could be included in a final agreement. It is especially useful in disputes involving many moving parts.  For example, in a dispute involving ground water and surface water users, a term sheet might suggest settlement concepts around the timing or rate of pumping, or the kinds of additional supplies to be provided to senior water users. A term sheet might also include  “the sleeves out of one’s vest,” which is a settlement element important to the other side, but of little value to the party proposing the concept.   

Complex negotiations often involve parties who don’t understand each other’s interests. Term sheets create understanding between parties, which makes negotiations more likely to be successful.  By structuring negotiations around a term sheet, the parties learn what is most important to one another. Moreover, stating settlement terms in concepts, rather than offers, allows parties to discuss ideas without fear of inflaming emotions.  In this respect, term sheets are similar to Straw Man Offers.  But term sheets are distinct from Straw Man Offers because they are written by mutual agreement among the parties, reflect the parties’ actual interests, and parties tend to construct term sheets later in the negotiation process.   

Proposing or agreeing to concepts in term sheets also builds trust between parties. In multi-party negotiations, a term sheet often leads to unexpected alliances on various issues, which can make negotiations more productive than if each individual party attempts to protect only its own interests (reflected in their own proposals and offers).  

In the example we started with, once the parties understood the idea of a term sheet, the discussions took on a more productive tone.  It still took many months of negotiation, but eventually the parties reached an amicable conclusion that satisfied—or dissatisfied—everyone equally.  

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**Sarah Klahn is a water lawyer with Somach Simmons & Dunn who tries cases when she has to and settles them when she can. Her offices are located in Boulder, Colorado. www.somachlaw.com

**David Belcher is an associate with Faegre Drinker Biddle & Reath. He assists clients with various aspects of legal proceedings and trial preparation. His offices are located in Las Angeles, California. https://www.faegredrinker.com

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