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Court Of Chancery Fashions Remedy For Failure To Negotiate

PharmAthene Inc. v. SIGA Technologies Inc.,  C.A. 2627-VCP (September 22, 2011)

This is an important decision for 2 reasons.  First, it clarifies the extent of a duty to negotiate in good faith.  Second, it crafts a remedy for a breach of that duty.  This is important because deal term sheets often provide for further "good faith" negotiations and what that means has been unclear in the past.  Further, it is also common for the mediation of commercial disputes to end with the basic terms set out in a memorandum of understanding with the details to be "negotiated in good faith."

First, it is important to understand when there is a binding obligation to negotiate in good faith.  In this case, 2 formal contracts between the parties required they have such further negotiations. Without a binding contract to do so, it remains doubtful  that just a simple agreement to continue discussions binds anyone.

Second, when the duty to negotiate does arise, what constitutes good faith is hard to define in the abstract.  This decision points out, however, that a refusal to continue to honor past agreements is "bad faith."  In short, you cannot go back on terms already agreed to as a way to get other concessions.

Third, when the duty to negotiate is violated, the remedy is critical.  As this decision points out, specific performance and a damage award of what one side says were its expectation damages may not be available for a variety of reasons.  Here, the Court provided a remedy that gave the non-breaching party what the Court felt were the benefits that the parties had agreed on generally, even if the details were not finalized.  This highlights the importance of reviewing the history of their negotiations to determine what is likely to have been the outcome had they fairly negotiated.

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