No-Shop / Exclusivity Clauses in Term Sheets (India)

A no-shop clause stops a founder or target company from talking to, or negotiating with, anyone else about a competing deal for a set window while a buyer or investor does due diligence. It is also called an exclusivity clause. The one thing most people get wrong: they assume that because the rest of the term sheet says "non-binding," the no-shop clause is too. In almost every Indian term sheet, it is the opposite. No-shop, along with confidentiality, costs, and governing law, is usually one of the few clauses the document expressly says WILL bind you, even while valuation, the board seat, and liquidation preference stay non-binding. (Adira, which publishes this guide, makes contract review and CLM software; this explainer is written to be useful whether or not you ever use it.)

That gap, "the deal terms are just a discussion" versus "this one clause is a real, enforceable promise", is where most no-shop disputes start. A founder signs a term sheet, keeps taking calls from other investors because the round is not closed, and later learns the exclusivity clause alone was enforceable all along. This guide covers what a no-shop clause actually restrains, how Indian contract law treats it, a 2025 Delhi High Court ruling built on exactly this structure, and what to check before you sign.

Plain meaning

A no-shop clause is a negative covenant. For a defined period after signing the term sheet, the target company and its founders agree not to solicit, initiate, or in some drafting even respond to competing offers, proposals, or inquiries about investing in or acquiring the company. In exchange, the buyer or investor gets a clear run at diligence and drafting the definitive agreements without worrying that a rival will jump in and out-bid them mid-process, or that the founder will use the term sheet purely as leverage to shop for a better price elsewhere.

Two flavours show up in Indian practice. In venture and growth-stage term sheets it is usually called "exclusivity" and stops the company running a parallel fundraise. In M&A and PE term sheets it is more often "no-shop" or "no-solicit" and stops the seller continuing a broader sale process once one bidder has exclusivity. Both convert the buyer's or investor's sunk diligence cost into a period of protected access.

Who it protects and what triggers it

The clause protects whoever is about to spend real money on lawyers, accountants, and diligence, usually the buyer or investor, before they have any certainty the deal will close. It is triggered from the date the term sheet is signed and runs for the stated exclusivity period, most commonly 30 to 60 days for an early-stage round, and 60 to 90 days for a diligence-heavy M&A or PE deal.

The obligation bites the moment the company, its founders, or (in wider drafting) its officers or advisers start a conversation with a third party about a competing transaction, or fail to shut down an inbound approach. It ends, if drafted properly, on the earlier of a fixed outside date or the signing of the definitive agreements. Badly drafted clauses tie themselves only to "until Closing," with no outside date, which becomes a problem if closing never happens.

What to look for

Six things decide how much this clause actually costs you:

1. "Solicit" versus "respond." Barring you from soliciting or initiating third-party discussions is narrow: an unsolicited approach is not automatically a breach. Barring you from "responding to" or "entertaining" any competing proposal is far broader and can force you to ignore a genuinely better offer that lands uninvited.
2. Duration and the outside date. Look for a fixed number of days or a calendar date, not an open-ended "until Closing." Also check whether the period silently renews if diligence drags on.
3. Scope of the restriction. Only this transaction and counterparty, or "any transaction of any kind, with any person, at any time"?
4. The break fee mechanic. Tied to a real, documented, capped cost the buyer actually incurs, or a flat lump sum unrelated to anything spent?
5. A fiduciary out. A carve-out letting the board respond to an unsolicited, genuinely superior offer, with notice to the original buyer, or none at all?
6. Whether the no-shop clause is itself named as binding. Term sheets typically list the handful of clauses that survive as binding obligations even though the rest is "subject to definitive agreements." Confirm exclusivity is on that list, since it is a promise you are making today, not a future intention.

If you are checking your own term sheet for these six things, you can mark the clause up free in Weave, Adira's browser-based contract review tool, and flag the duration, the solicit-versus-respond wording, and the break-fee number for a second look before you sign.

The Indian position: Contract Act, quoted

Two provisions of the Indian Contract Act, 1872 matter here, cutting in different directions.

Section 27 voids agreements restraining trade, and is the provision most people reach for reflexively on seeing any exclusivity language. It reads:

"Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."

Read the full section, with its exception for the sale of business goodwill, on Indian Kanoon. In practice, Section 27 has minimal bite on an ordinary no-shop clause. It does not stop the company from carrying on its business, hiring staff, or selling its product. It stops one specific negotiation, for a short, defined window, with a counterparty already at the table, a narrow commercial restriction, not a restraint on "exercising a lawful profession, trade or business" in the sense courts read into Section 27 for non-competes. The risk rises only if a no-shop runs unusually long, has no outside date, and is wide enough to stop the company transacting with anyone at all, at which point it starts to look like a restraint a court could cut down.

Section 74 matters for the other half of most no-shop clauses: the break fee or cost-reimbursement obligation that fires if you breach exclusivity. It reads:

"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."

Read the full text on Indian Kanoon. Indian law does not simply enforce whatever number the term sheet names. It caps recovery at "reasonable compensation," which the Supreme Court has read to still require proof of actual loss where that is provable, capped by the stated figure. A break fee set as a round number with no relationship to the buyer's actual diligence and legal spend is exactly the kind of clause Section 74 exists to cut down to size.

A named Indian case: OYO v Zostel

The clearest recent illustration of how Indian courts treat a "mostly non-binding, but this clause binds" term sheet is the dispute between Oravel Stays Private Limited (OYO) and Zostel Hospitality Private Limited. On 26 November 2015, OYO, Zostel, and two of Zostel's investors, Tiger Global's Internet Fund III and Orios Venture Partners, signed a term sheet for OYO to acquire Zostel's budget-hotel business. The term sheet stated it was non-binding except for five named clauses: confidentiality, approvals, expenses, exclusivity, and governing law and arbitration. Closing was conditional on the parties later executing separate, definitive agreements.

The deal never closed. Zostel went to arbitration, and in 2021 a sole arbitrator held that the parties' conduct showed they intended the whole arrangement to be binding, awarding Zostel a stake of up to 7 percent in OYO's parent, Oravel Stays.

OYO challenged that award, and on 13 May 2025 the Delhi High Court set it aside, in Oravel Stays Private Limited v Zostel Hospitality Private Limited (2025:DHC:3661). The court held that an arbitrator cannot use "conduct" to convert a term sheet that expressly named only five binding clauses into a fully binding contract; there was no consensus ad idem on the definitive agreements that closing was conditioned on. Zostel tried to appeal directly to the Supreme Court; on 29 July 2025 the Supreme Court declined to entertain the petition, holding Zostel should instead have filed a statutory appeal under Section 37 of the Arbitration and Conciliation Act, 1996, leaving the Delhi High Court's ruling in place.

The lesson for a no-shop clause specifically: exclusivity was literally one of the five clauses OYO and Zostel carved out as binding in a document that was otherwise "just talk." That structure is exactly how Indian no-shop clauses are usually drafted, and the ruling confirms Indian courts will hold parties to an express carve-out list, while refusing to let "conduct" bind the rest of the document.

Red flags table

Normal	Red flag	Why it matters
30 to 60 days, tied to a fixed calendar date	4 to 6 months or more, no outside date	Open-ended lock-in strips your leverage; buyer sits indefinitely
Ends on the earlier of the outside date or signing of definitive agreements	No stated end trigger, or auto-renews if diligence drags	Traps the target in exclusivity while the buyer stalls, at no cost to itself
Bars soliciting or initiating third-party discussions	Bars even responding to an unsolicited approach	Forces the board to ignore a genuinely superior offer, no carve-out at all
Break fee tied to the buyer's actual, documented, capped costs	A flat lump sum unrelated to any real cost	Reads as a penalty, cut down to "reasonable compensation" under Section 74
Exclusivity named on the term sheet's short list of binding clauses	Says "non-binding" with no clear list of what does bind	This exact ambiguity produced years of litigation in OYO v Zostel
Scope limited to this transaction and counterparty	"Any transaction of any kind, with anyone," no limit	Starts to look like a restraint on doing business, nearer Section 27 territory
Buyer has a matching deadline to deliver signed definitive agreements or walk	No obligation on the buyer's timeline; diligence can run indefinitely	One-sided exclusivity with no reciprocal deadline is pure buyer leverage
Remedy is capped cost reimbursement or a modest break fee	Remedy includes specific performance, locking you in indefinitely	Converts a short commercial restriction into forced exclusivity with no exit

Bad clause, better clause

Bad: "From the date of this Term Sheet until the Closing, the Company and the Founders shall not, directly or indirectly, solicit, initiate, encourage, entertain, or respond to any inquiry, proposal, or offer from any person other than the Investor relating to any investment in, or acquisition of, the Company, and shall pay the Investor a break fee of INR 50,00,000 in the event of any breach of this clause, this obligation surviving indefinitely."

What is wrong with it: "until Closing" with no outside date means the restriction never expires if the deal simply stalls; "respond to" bars the company from even acknowledging an unsolicited superior offer, with no fiduciary out; and a flat INR 50 lakh break fee with no link to actual cost is close to a textbook Section 74 penalty that a court would cut down to reasonable compensation.

Better: "From the date of this Term Sheet until the earlier of (a) 45 days from the date hereof, or (b) execution of the Definitive Agreements (the 'Exclusivity Period'), the Company and the Founders shall not, directly or indirectly, solicit or initiate discussions with any third party regarding an investment in, or acquisition of, the Company. Nothing in this clause prevents the Company or its Board from responding to, or negotiating, an unsolicited written proposal that the Board reasonably determines is superior, provided the Investor is notified within two business days of receiving it. If the Company breaches this clause, it shall reimburse the Investor's documented, reasonable legal and diligence costs actually incurred after the date hereof, capped at INR [X] lakh. This clause, and the Confidentiality, Governing Law, and Dispute Resolution clauses, are the only binding provisions of this Term Sheet; all other provisions are statements of intent only and are not binding on either party."

What changed and why: a fixed 45-day outside date replaces the open-ended "until Closing"; "solicit or initiate" replaces "respond to," restoring the company's ability to react to an unsolicited better offer through an explicit fiduciary out; the break fee is tied to actual, documented, capped costs, defensible as compensation rather than a penalty under Section 74; and the binding-clauses list is stated expressly, the drafting discipline the OYO v Zostel dispute rewards.

How it interacts with related clauses

A no-shop clause rarely stands alone:

• The rest of the term sheet. This clause only makes sense read against which other clauses actually bind you. See How to Review a Startup Term Sheet in India.
• Standstill clauses. A no-shop restrains the seller from courting other buyers; a standstill restrains the buyer, acquirer, or lender from taking further action, such as building a stake or enforcing debt. Opposite problems, same family. See Standstill Clauses: Pausing Rights in Deals and Debt.
• Liquidated damages and penalty. The break-fee mechanic is a liquidated-damages clause in miniature, and lives or dies on the same Section 74 test. See Liquidated Damages vs Penalty in India.
• Confidentiality. Almost always on the same short "binding clauses" list as exclusivity. See Confidentiality Clauses Explained.
• Conditions precedent. The OYO v Zostel term sheet made closing conditional on definitive agreements, a conditions-precedent structure in its own right. See Conditions Precedent, Explained.

US and global contrast

In the United States, no-shop and no-solicit clauses appear not just in letters of intent but inside the definitive merger agreement itself, paired with a "fiduciary out" and a "reverse break fee" the buyer pays if it walks away. Delaware courts have built a large body of case law, going back to Revlon and its successors, on how much room a board must keep to consider a better offer despite a signed no-shop, because a board's fiduciary duty to shareholders survives a no-shop covenant.

India has no equivalent statutory or case-law framework built specifically around no-shop clauses; the analysis runs through general contract principles, Section 27 and Section 74 above, and increasingly through rulings like OYO v Zostel on when a term sheet's carve-out list actually binds. The practical difference for a drafter: in India, write the fiduciary out and the binding-clauses list into the term sheet yourself, rather than assuming case law will read one in for you.

FAQ

Is a no-shop clause enforceable in India even though the term sheet says "non-binding"? Yes, if it is expressly carved out as one of the binding clauses, which is how most Indian term sheets draft it. OYO v Zostel shows Indian courts hold parties to that express carve-out list, while refusing to let anyone argue the rest of a non-binding term sheet became binding through conduct.

How long should a no-shop or exclusivity period be? Typically 30 to 60 days for an early-stage round, and 60 to 90 days for a diligence-heavy M&A or PE deal. Whatever the number, tie it to a fixed outside date or the signing of definitive agreements, whichever comes first, not left open-ended.

Can I be made to pay a break fee even if I never signed anything after the term sheet? Yes, if the no-shop and cost-reimbursement clauses were named as binding. But the amount is not automatically enforceable as written; under Section 74, a court caps it at reasonable compensation for actual, provable loss, not the round number written into the clause.

Does a no-shop clause stop me from talking to a rival who approaches me unprompted? It depends on the verb. "Solicit" or "initiate" is narrow and usually still lets you respond to an approach you did not seek out. "Respond to" or "entertain" is broad and can bar even a reply, unless there is a fiduciary-out carve-out for a genuinely superior offer.

What is the difference between a no-shop clause and a standstill clause? A no-shop restrains the seller from courting other buyers. A standstill restrains the buyer, acquirer, or lender from taking further action, like increasing a shareholding or enforcing debt. Mirror-image restrictions used at different moments of a deal.

Does a no-shop clause survive if the deal falls through? Only if drafted to. The safer approach ties the no-shop to a fixed outside date or execution of the definitive agreements, whichever happens first, so it expires automatically rather than lingering after talks have died.

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This guide explains how Section 27, Section 74, and the OYO v Zostel ruling generally treat no-shop and exclusivity clauses in Indian term sheets. It does not tell you whether your specific clause's duration, scope, or break-fee number would hold up if contested, that depends on the exact wording, the deal facts, and what a court or arbitrator makes of them. For that, before you sign a term sheet with real teeth in its exclusivity clause, talk to a lawyer who can read the whole document, not just this one section.