In SIGA Technologies, Inc v PharmAthene, Inc the Delaware Supreme Court affirmed that a contractual obligation to negotiate in good faith is enforceable.(1) In late 2005 SIGA Technologies, Inc and PharmAthene, Inc began discussing a possible merger, but SIGA Technologies insisted that the parties negotiate a licence agreement first, given its immediate need for cash. After extensive negotiations over a "non-binding" licence agreement term sheet, PharmAthene gave SIGA a bridge loan and the parties ultimately executed a merger agreement in June 2006. The bridge loan and merger agreement both provided that in the event of failure of the merger, the parties would "negotiate in good faith with the intention of executing" a licence agreement reflecting the contents of the negotiated, non-binding term sheet.
The proposed merger eventually failed to close and negotiations over the definitive licence agreement stalled as SIGA proposed economic terms significantly more favourable to it than those set forth in the licence agreement term sheet. For example, SIGA proposed to increase the upfront payment to be received by SIGA from $6 million to $100 million, and the milestone payments to be paid by PharmAthene increased from $10 million to $235 million. The Delaware Supreme Court affirmed the Chancery Court's conclusion that SIGA Technologies breached its contractual obligation to negotiate the licence agreement in good faith. Since the court found that the parties would have reached an agreement but for SIGA Technologies' bad-faith negotiations, the plaintiff was entitled to recover contract expectation damages. This case serves to remind that an agreement to negotiate in good faith should not be entered into lightly, and that it may be risky to unilaterally depart from the key agreed terms during a negotiation if a letter of intent includes a binding good faith negotiation obligation.
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