The Perils of A Duty to Negotiate in Good Faith

I’ve recently finished writing a textbook on contract clauses which takes a different approach to teaching contracts.  The book, to be published in September, uses contract clauses and case excerpts to introduce doctrinal concepts and to teach students how to problem solve.  (I always thought it unfortunate that a typical 1L learns contract law without knowing what common contract clauses mean or how they relate to what they’ve been learning). One of the cases mentioned in my book is SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A. 3d 330 (Del. 2013).  I’ve been meaning to blog about this case for some time now because it’s an important one for readers of this blog and corporate lawyers everywhere and illustrates the importance of using the right words in a contract. 

SIGA and PharmAthene signed a term sheet for an eventual license agreement and partnership to further develop and commercialize an anti-viral drug for the treatment of small pox.  The term sheet was not signed and contained a footer on each page that stated “Non Binding Terms.”  Subsequently, the parties drafted a merger term sheet that contained the following provision:

“SIGA and PharmAthene will negotiate the terms of a definitive License Agreement in accordance with the terms set forth in the Term Sheet…attached on Schedule 1 hereto.  The License Agreement will be executed simultaneously with the Definitive [Merger] Agreement and will become effective only upon the termination of the Definitive Merger Agreement.”

 The license agreement term sheet was attached as an exhibit to the merger term sheet.  On March 10, 2006, the parties signed a merger letter of intent and attached the merger term sheet and the license agreement term sheet. 

On March 20, 2006, the parties entered into a Bridge Loan Agreement where PharmAthene loaned SIGA $3million for expenses relating to the merger and for costs related to developing ST-246.  It stated the following in Section 2.3:

“Upon any termination of the Merger Term Sheet….termination of the Definitive Agreement relating to the Merger, or if a Definitive Agreement is not executed…., SIGA and PharmAthene will negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the terms set forth in the License Agreement Term Sheet …and [SIGA] agrees for a period of 90 days during which the definitive license agreement is under negotiation, it shall not, directly or indirectly, initiate discussions or engage in negotiations with any corporations, partnership, person or other entity or group concerning any Competing Transaction without the prior written consent of the other party or notice from the other party that it desires to terminate discussions hereunder.”

On June 8, 2006, the parties signed the Merger Agreement which contained a provision nearly identical to section 2.3 of the Bridge Loan Agreement and provided that if the merger was terminated, the parties agreed to negotiate in good faith to enter into a license agreement with the terms of the License Agreement term sheet.  The Merger Agreement also 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.”

Shortly thereafter, SIGA terminated the Merger Agreement and announced that it had received a $16.5million NIH grant.  SIGA also proposed different licensing terms from those contained in the term sheet and argued that the license agreement term sheet was not binding because of the “Non-Binding” footer.  PharmAthene sued — and won.  SIGA appealed and the Supreme Court of Delaware found that the “express contractual language” obligated the parties to “negotiate in good faith with the intention of executing a definitive License Agreement” with terms “substantially similar” to the terms in the license agreement term sheet. 

The damages to PharmAthene ended up being around $200million– in other words, expectation damages.   In order to stop PharmAthene from enforcing the judgment while undergoing the appeals process, Siga filed for Chapter 11 bankruptcy.   Siga subsequently lost its second appeal to the Delaware Supreme Court, which upheld the award of expectation damages.

Last week, the U.S. Bankruptcy Court for the Southern District of New York approved a reorganization plan that sets the stage for SIGA to exit from bankruptcy.  The judgment is expected to be satisfied by October 20, 2016.

A long and expensive road for SIGA which could have been avoided by paying more attention to the language used in the contract.