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Anthony Kappus

Is the term sheet you just signed an enforceable agreement, or is it simply an “agreement to agree?”  The Delaware Court of Chancery took up this question in a recent decision, Pharmathene, Inc. v. Siga Technologies, Inc.  The full opinion is available here.

The court, addressing whether a term sheet for a licensing agreement was binding on the parties, set out a two part test:

  1. Did the parties intend to be bound by the document?
  2. Does the document contain all the essential terms of an agreement?

Elaborating on the second point, the court stated that the test for determining if all essential terms have been agreed to is “[w]hether a reasonable negotiator…would have concluded, in that setting, that the agreement reached constituted agreement on all of the terms that the parties themselves regarded as essential and thus that the agreement concluded the negotiations…”  The court is clear, however, that a term sheet can be enforceable even if some details are subject to further negotiation, as long as all essential terms are in place.

In practice, drafters should reduce the risk of inadvertently creating an enforceable agreement, being unable to enforce an agreement that was meant to be binding, or dedicating time and resources to litigating whether an enforceable agreement exists, by clearly stating the parties’ intent in the term sheet itself.

In Pharmathene, the court dismissed Siga Technologies’ motion for summary judgment, finding that it was plausible that Pharmathene would be able to show that agreement had been reached on all essential terms and, therefore, that an enforceable agreement existed.