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Delaware Supreme Court Rules that Expectation Damages are an Appropriate Remedy for Breach of an Obligation to Negotiate a Term Sheet in Good Faith

The Delaware Supreme Court recently ruled in SIGA Technologies, Inc. v. PharmAthene, Inc., No. 314, 2012, 2013 Del. LEXIS 265 (Del. May. 24, 2013), that a party may be liable for expectation damages for failing to comply with a covenant to negotiate in good faith. That is, where the facts demonstrate that (i) a party has breached its obligation to negotiate in good faith and (ii) but for that party’s bad faith, the parties would have entered into a binding agreement, the Supreme Court found that it is an appropriate remedy under Delaware law to award reasonably foreseeable damages in an amount that would put the non-breaching party in the same position it would have occupied had a binding agreement been entered into.

Further, the parties in the instant case had agreed to negotiate in good faith in accordance with a term sheet, and the court concluded that the measure of reasonably foreseeable expectation damages could be based on that term sheet, notwithstanding that the term sheet purported on its face to be non-binding. The case provides a useful reminder to corporate practitioners that careful attention should be paid when drafting preliminary documents and that a binding obligation to negotiate in good faith ought to be taken seriously. Documents intended to only set forth preliminary terms should clearly disclaim any other intentions to avoid any implication of binding obligations on the parties

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