Agreements to Negotiate in Good Faith Can be Enforceable

by Burns & Levinson LLP
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Time-honored precedent holds that “an agreement to reach an agreement is a contradiction in terms and imposes no obligation on the parties thereto.”  Thus, as I discussed in a prior post, a letter of intent (LOI) will not be binding if it does not contain all of the material terms of the contemplated agreement.  But what happens if there is an open material term, and the parties agree to “negotiate in good faith” towards resolving that outstanding matter?  That is exactly the situation addressed by the Delaware Supreme Court in Siga Technologies, Inc. v. Pharmathene, Inc.

In Siga, the parties negotiated an LOI whereby Pharmathene would be granted a license to use a drug that Siga was developing.  The two-page LOI was not signed, however, and each page had a footer stating “Non Binding Terms.”  As the negotiations continued, discussions of a license agreement morphed into a contemplated merger of the two companies, and they eventually executed a Merger Agreement.  Significantly, however, the Merger Agreement had a short deadline to closing and allowed the parties to terminate if that deadline was not met.  The Merger Agreement also stated that if it was terminated, the parties would negotiate in good faith towards a definitive license agreement, and the prior LOI related to that potential license was attached to the Merger Agreement.  Finally, the Merger Agreement expressly stated that the parties must use their “best efforts to take such actions as may be necessary or reasonably requested by the other parties hereto to carry out and consummate the transactions contemplated by this Agreement.”

When the deadline to close on the merger was not met, Siga exercised its right to terminate the Merger Agreement.  The parties then proceeded to negotiate a license agreement, but Siga took the position that because the LOI was “Non Binding,” the business terms set out in that document were meaningless.  Indeed, Siga eventually sent an ultimatum to Pharmathene stating that Siga only would continue to negotiate if Pharmathene proceeded “without preconditions” related to the LOI.  Pharmathene refused to capitulate and filed suit in the Delaware Court of Chancery, claiming that Siga had breached its obligation to negotiate in good faith.

While Siga argued that it would be improper to require it to negotiate in accordance with the terms set forth in the LOI because that document was not binding, the Chancery Court and the Delaware Supreme Court disagreed.  Both found that because the LOI was attached to the Merger Agreement, Siga had an obligation to refrain from demanding terms in a license agreement that were substantially different from those set forth in the LOI.  Because Siga failed to do so, it breached its obligation to negotiate in good faith.

To make matters even worse for Siga, the Chancery Court found that “but for SIGA’s bad faith negotiations, the parties would have consummated a license agreement.”  As such, Pharmathene was not simply awarded reliance damages, it was awarded benefit of the bargain damages, i.e., damages as if a license agreement had been consummated and then breached by Siga.

In light of Siga and some other cases around the country, in-house counsel need to take agreements to negotiate in good faith very seriously – even if they only are in an LOI or other preliminary agreement.  Failing to do so could expose your company to a substantial risk of damages or waive your company’s ability to force a business partner to keep negotiating when you would like it to do so.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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