From non-binding term sheets to executed definitive agreements, the legal consequences of walking away from a deal depend on the stage, the precise wording and conduct of the parties.
What happens when a party wants to walk away from a transaction just days before closing?
A transaction may have progressed through months of negotiations, due diligence and documentation before a buyer, seller or investor decides not to proceed. Whether that decision is legally permissible and whether it exposes the withdrawing party to legal consequences depends heavily on the stage of the transaction, the contractual terms and the circumstances giving rise to the withdrawal.
I. Introduction:
In India’s dealmaking landscape, spanning M&A, private equity and venture capital investments, joint ventures, and other commercial transactions, an eleventh-hour deal collapse is not merely a business setback, it can have substantial legal consequences. Whether it is a private equity buyout abandoned days before closing, a real estate transaction unwound after exchange of contracts, or a joint venture dismantled after a term sheet is signed, last-minute walkaways raise complex questions of liability, remedies, and enforceability under Indian law.
This article examines the legal landscape governing deal break situations in India, with a focus on breach of contract, pre-contractual liability, and the remedies available to an aggrieved party.
II. The Anatomy of a Last-Minute Walkaway
A 'last-minute walkaway' typically occurs at one of three stages: (i) during negotiations, before any binding agreement is signed; (ii) after execution of a term sheet, letter of intent (“LOI”), or memorandum of understanding (“MoU”); or (iii) after execution of definitive agreements, but prior to closing.
Each stage carries a distinct legal risk profile. The consequences differ materially depending on whether the withdrawing party assumed binding obligations and, if so, whether those obligations were qualified by any conditions precedent.
- III. Pre-Contractual Liability: The MoU and LOI Problem
- Are Term Sheets, LOIs and MoUs Binding?
- The enforceability of a term sheet, LOI or MoU under Indian law is, at the threshold, contingent upon whether it satisfies the essential elements of a valid contract under Section 10 of the Indian Contract Act, 1872 (“Contract Act”), namely free consent, lawful consideration, lawful object, and competency of the parties to contract.
Additionally, the Hon’ble Delhi High Court in its recent decision in Oravel Stays Private Limited v. Zostel Hospitality Private Limited (2025 SCC OnLine Del 3377:(2025) 320 DLT 614) provided guidance on the enforceability of term sheets, which are, in substance, often intended to be largely non-binding. The Hon’ble Court held that where a term sheet expressly states that the substantive commercial terms are non-binding and subject to completion of due diligence, internal approvals and execution of definitive agreements, no enforceable obligation to consummate the proposed transaction arises unless those conditions are satisfied. The Hon’ble Court further clarified that subsequent conduct, including extensive negotiations or operational cooperation, cannot by itself override clear contractual language indicating that the parties did not intend to be bound at the preliminary stage.
At the same time, the Hon’ble Court recognised that specific provisions within a term sheet such as confidentiality, exclusivity, governing law, dispute resolution and cost allocation may be independently enforceable if the document expressly states those clauses to be binding. In other words, while parties may remain free to walk away from the principal transaction, they may still incur liability for breaching ancillary obligations that were intended to have immediate legal effect.
It bears noting that the aforementioned decision is presently under challenge before a Division Bench of the Hon’ble Delhi High Court, and the position stated above should therefore be read as subject to the outcome of the pending appeal.
IV. Post-Execution Walkaways: Breach of Contract
- The Legal Framework
Where definitive agreements such as Share Purchase Agreements, Business Transfer Agreements, or Shareholders’ Agreements have been duly executed, a last-minute refusal by a party to complete the transaction may constitute a repudiatory breach of contract. Such repudiation may occur either through an express communication, prior to the agreed closing date, that the party will not perform its obligations (anticipatory breach), or by a failure to perform on the closing date itself.
Section 39 of the Contract Act inter alia provides that where a party refuses to perform, or disables itself from performing its obligations in their entirety, the counterparty may treat the contract as repudiated and seek appropriate remedies, unless it has, by words or conduct, signified its acquiescence in the continuance of the contract. Where the repudiation occurs before the date fixed for performance, the aggrieved party is not required to wait until the closing date and may immediately pursue remedies for breach.
- Remedies Available to the Aggrieved Party
- Indemnity claims under the definitive agreement: Definitive agreements typically contain representations and warranties relating to the parties, the target business, and the transaction, together with indemnity provisions allocating the risk of inaccuracies or breaches. If a party discovers, prior to closing but pursuant to execution of the definitive agreements, that any representation or warranty is inaccurate or misleading, or that a covenant has been breached, it may be entitled to assert a claim for indemnification in accordance with the claims procedure set out in the relevant agreement. By way of illustration, if a purchaser executes definitive agreements in reliance on the seller’s representations regarding title to shares, regulatory compliance, or absence of undisclosed liabilities, and subsequently discovers that such representations were materially inaccurate, the purchaser may invoke the contractual indemnity provisions and, depending on the materiality and contractual structure, may also refuse to complete the transaction.
- Damages under Sections 73 and 74 of the Contract Act: Section 73 of the Contract Act entitles the non-breaching party to recover compensation for losses that arise naturally in the usual course of events from the breach, or which the parties knew, at the time of contracting, were likely to result from such breach. Compensation is limited to direct and foreseeable losses and does not extend to remote or indirect damages.
Section 74 of the Contract Act applies where the contract stipulates a fixed sum as liquidated damages. In such cases, the aggrieved party is entitled to recover reasonable compensation, not exceeding the amount so stipulated. Indian courts have consistently held that where the stipulated sum represents a genuine pre-estimate of loss, strict proof of actual damage may not be required, although the amount awarded must remain reasonable in the circumstances.
- Specific Performance under the Specific Relief Act, 1963: Where monetary damages would not constitute an adequate remedy, the aggrieved party may seek specific performance compelling the defaulting party to perform obligations agreed to under the definitive agreements.
- Injunctions: The aggrieved party may also seek temporary, interim, or permanent injunctive relief to preserve the status quo pending adjudication. Such relief may include orders restraining the defaulting party from transferring the subject matter of the transaction to a third party, dissipating assets, or acting in breach of any negative covenant or exclusivity undertaking contained in the definitive agreements.
V. Conditions Precedent, MAC Clauses, and Termination Rights
Definitive transaction documents typically contain provisions that permit a party to terminate the transaction without liability upon the occurrence of specified events or the non-fulfilment of agreed conditions. The most common examples are conditions precedent to closing and material adverse change (“MAC”) clauses. A party seeking to rely on such provisions bears the burden of demonstrating that the relevant condition has not been satisfied or that the specified triggering event has occurred.
A MAC clause is a contractual risk-allocation mechanism that entitles a party, most commonly the purchaser, to terminate the transaction or renegotiate its terms if a material adverse event affects the target business between signing and closing. Under Indian law, the enforceability of MAC clauses is governed primarily by the Contract Act. To the extent the parties make closing obligations contingent upon the occurrence or non-occurrence of specified events, such provisions are generally enforceable as contingent contracts under Section 32 of the Contract Act.
Section 56 of the Contract Act, which embodies the doctrine of frustration, is conceptually distinct and applies only where performance becomes impossible or unlawful. Indian courts have consistently held that commercial hardship, increased expense, or a deterioration in the economic attractiveness of the transaction is insufficient to invoke frustration, the threshold is one of legal or practical impossibility.
Indian courts, while not having extensively ruled on MAC clauses in the acquisition context, have drawn guidance from Delaware jurisprudence. In evaluating such clauses, courts would likely examine whether the material adverse change is durationally significant, disproportionate to industry peers, and not within the risk allocation contemplated under the agreement. A party that invokes a MAC clause in bad faith or without reasonable basis may itself be held in breach.
Transaction documents may also provide for break fees or reverse break fees payable upon termination in specified circumstances. Such provisions are generally enforceable under Section 74 of the Contract Act, provided the stipulated amount represents a genuine pre-estimate of loss and is not penal in nature.
VI. Regulatory and Sector-Specific Considerations
In transactions that require statutory or regulatory approvals such as approvals from the Competition Commission of India or the Securities and Exchange Board of India or the Reserve Bank of India etc., completion of the transaction is typically made conditional upon receipt of such approvals. Where the transaction documents expressly provide that obtaining the relevant approvals is a condition precedent to closing, either party may be entitled to terminate the transaction without liability if the approvals are denied, not obtained within the agreed long-stop date, or are granted subject to materially onerous conditions.
VII. Conclusion
A last-minute walkaway from a transaction is seldom without legal consequence. Whether the parties are operating at the term sheet stage or under fully executed definitive agreements, Indian law distinguishes between non-binding preliminary arrangements and binding contractual commitments and provides a range of remedies where a party withdraws without a valid contractual basis.
Once definitive agreements have been executed, a party seeking to terminate must ordinarily be able to point to an express contractual right, such as the non-fulfilment of a condition precedent, the occurrence of a material adverse change, or the expiry of a long-stop date. Absent such a right, the withdrawal may constitute a repudiatory breach exposing the defaulting party to claims for damages, indemnification, specific performance, and injunctive relief.
From a transactional perspective, the most effective protection lies in careful drafting. Parties should ensure that term sheets clearly identify which provisions are binding, that conditions precedent and MAC clauses are objectively defined, and that termination provisions, including break fee or reverse break fee arrangements, are proportionate and enforceable. Thoughtful drafting at the outset remains the best means of allocating risk and reducing the prospect of costly disputes if either party seeks to walk away from the transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
