Delaware Update: Supreme Court Awards Expectation Damages for Failure to Negotiate in Good Faith
In a case involving the breach of an express obligation to negotiate a license in good faith based on a preexisting term sheet, the Delaware Supreme Court—resolving a "difficult and largely unsettled question"—ordered the breach remedied by expectation, rather than mere reliance, damages. SIGA Techs., Inc. v. PharmAthene, Inc., No. 314,2012 (Del. May 24, 2013).
Distress Transaction Blocked by Seller's Remorse
SIGA Technologies, Inc., lacking the financial resources to develop a vaccine, negotiated a license term sheet with PharmAthene, Inc. The term sheet specified the amounts of PharmAthene's payments and profit-sharing rights. Although the term sheet was not signed and a footer on each page read "Non Binding Terms," the parties subsequently executed a merger agreement that provided that, if the merger were not consummated, the parties would "negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the terms set forth in the License Agreement Term Sheet." Shortly thereafter, SIGA received a sizeable federal grant and the merger fell through. PharmAthene then demanded a license in compliance with the term sheet and signed merger agreement. Claiming that the term sheet was not binding, SIGA's negotiators insisted on commercial terms that were radically less favorable to PharmAthene than those already set forth in the term sheet.
PharmAthene filed suit in Chancery Court, and after an 11-day trial, Vice Chancellor Parsons held SIGA liable for breach of its express obligation in the merger agreement to negotiate in good faith and awarded "an equitable payment stream" approximating that contemplated in the term sheet.
The Supreme Court Awards Expectation Damages
On SIGA's appeal, the Supreme Court held that the executed (albeit unconsummated) merger agreements required good-faith negotiation of a license agreement "in accordance with the terms set forth" in the term sheet, and that SIGA's insistence on completely inconsistent terms was in bad faith.
As to the remedy for SIGA's breach, the Supreme Court noted that Delaware decisions had left open the question of whether expectation damages are ever available for breach of a duty to negotiate in good faith. The court held that expectation damages may be awarded, even where the parties have left open some terms, provided that (i) they intended to negotiate open terms in good faith and (ii) "the trial judge makes a factual finding, supported by the record, that the parties would have reached an agreement but for the defendant's bad faith negotiations." Finding those requirements satisfied, the Supreme Court remanded the case to the Court of Chancery for calculation of PharmAthene's expectation damages.
Good-Faith Duty to Negotiate Generally. The SIGA decision was based on a highly unusual fact pattern in which a term sheet was, on its face, nonbinding but was attached to definitive transaction documents, which included an express obligation to negotiate a full license agreement in certain circumstances. While the court cited, with seeming approval, cases indicating that a duty to negotiate in good faith can arise even in the absence of express language to that effect, we do not believe that SIGA necessarily stands for the proposition that nonbinding term sheets generally impose a duty to negotiate and/or agree to definitive terms. However, this decision should serve as a reminder that it is important to expressly disclaim obligations to negotiate and agree in term sheets, letters of intent, and similar documents.
Damages. The most important aspect of the decision is the court's holding that benefit of the bargain, rather than reliance, damages are available where a court finds that a deal would have been reached but for the defendant's bad faith. This raises the stakes significantly and further emphasizes the importance of considering and understanding the intent of the parties before entering into these types of arrangements.
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Patricia J. Villareal
Marjorie P. Duffy, an associate in the Columbus Office, assisted in the preparation of this Alert.
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