March 23, 2016
Prior to entering into a definitive commercial agreement, parties often enter into a letter of intent, a term sheet or a memorandum of understanding (a preliminary agreement). Some of the provisions in the preliminary agreement may be intended to be binding on the parties (e.g., no-shop clauses) while others are not. Problems arise when negotiations falter and the prospective deal breaks down. A party that feels jilted may argue that the preliminary agreement created binding obligations that the other party did not expect. Among the potentially binding obligations that may be pressed in these situations is the duty to negotiate a definitive agreement in good faith based on the terms of the preliminary agreement.

In related decisions (the SIGA decisions), the Delaware Supreme Court signaled an increased risk exposure for parties that enter into preliminary agreements. The Supreme Court established that (i) an agreement between the parties to negotiate in good faith in accordance with a letter of intent is an enforceable obligation, and (ii) a court may award expectation damages if the record supports a finding that an agreement would have been reached but for the defendant’s breach of its obligation to negotiate in good faith. In the SIGA decisions, the Supreme Court upheld expectation damages of $113 million based on SIGA’s breach of its duty to negotiate a definitive agreement based on the terms set forth in the preliminary agreement.

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