When Is A Non-Binding Term Sheet Or Letter Of Intent Enforced As A Binding Contract?

In almost all corporate transactions, the first piece of written documentation the parties exchange and execute (after a non-disclosure agreement) is a letter of intent or term sheet ("LOI"), which is intended to summarize the main deal points. And as many corporate transactions involve entities organized in Delaware, these documents often select Delaware as the governing law.

Typically, this same LOI documentation is clearly identified as "non-binding," as it usually represents merely the initial, tentatively negotiated business points between the main players of each side of the deal. The task is then left to outside or in-house counsel to craft the definitive agreements to memorialize the business points reflected in the LOI. Unless a particular provision is clearly identified in the non-binding LOI as, in fact, "binding" (such as an exclusivity provision), most lawyers assume that there cannot be liability if the definitive agreement differs from the LOI or if no final agreement is ultimately reached based on that LOI. A decision earlier this year from the Delaware Supreme Court, however, calls that assumption into question, suggesting that, under Delaware law, both the "binding" and expressly "non-binding" provisions of an LOI may be enforceable as a binding contract if the trial judge were to determine what the parties "would have agreed to" had they negotiated in good faith. This case calls into question a provision that many practitioners may not focus on: what is (or should be) the governing law for the LOI, as that single provision may make all the difference between a non-binding LOI and an enforceable agreement.

In SIGA Technologies, Inc. v. PharmAthene, Inc., No. 314, 2012, 67 A.3d 330 (Del. May 24, 2013), the Delaware Supreme Court approved recovery of "benefit of the bargain" damages for breach of a duty to negotiate based on an expressly non-binding LOI. SIGA owned a potentially valuable antiviral drug for the treatment of smallpox. However, SIGA no longer had the resources to develop or exploit that drug. Sensing an opportunity for a merger, PharmAthene entered into negotiations to provide financing. SIGA was not interested in a merger and offered to enter into a license in exchange for funding. The parties negotiated a non-binding License Agreement Term Sheet ("LATS"). However, rather than agree to the LATS, PharmAthene insisted that the parties explore a merger first. Therefore, the parties executed to a merger agreement...