SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (Dec. 23, 2015). Why This Case Is Noteworthy: Any lawyer interested in the latest iterations of contract law by the Delaware Supreme Court needs to read this opinion. More specifically, any lawyer who advises clients on the binding nature or enforceability of letters of intent, or preliminary agreements, for example, in connection with mergers, needs to read this opinion. The Delaware Supreme Court affirmed a decision from the Court of Chancery in which two types of preliminary agreements were upheld as enforceable. The first, known as a Type I agreement, involves an agreement where the parties have consented to the essential terms but may not have formalized their agreement in a fully executed document. The next type of enforceable preliminary agreement is known as a Type II. This category of preliminary agreement refers to an “agreement to negotiate in good faith,” when all essential terms have not been agreed to, and that was the type of preliminary agreement involved in this opinion in which the Supreme Court upheld expectation damages of $113 million.
Procedural history: This decision is the second opinion by the Delaware Supreme Court in this case. Highlights of the prior Delaware Supreme Court opinion in this case, and a few of the multiple decisions by the Delaware Court of Chancery in this case have been highlighted on these pages, and are available at this hyperlink.
Key facts: The factual basis for this decision is a merger agreement entered into between the parties which provided that if the merger was not consummated for whatever reason, then the parties would negotiate in good faith to enter into a license agreement. The merger was not consummated. The Court of Chancery found that SIGA, in bad faith, refused to negotiate a license agreement when the merger was terminated. Parenthetically, after the judgment was entered by the trial court, SIGA filed for bankruptcy. The facts are available in the prior Delaware opinions highlighted at the above link, and also are described in the first 37-pages of the 57-page majority opinion.
Also notable about this decision is that it features a divided Delaware Supreme Court which is not common, as well as a 28-page dissent that is quite vigorous in its opposition.
Key Takeaways: One of the more notable takeaways from this seminal contract pronouncement by Delaware’s high court is on the issue of contract damages, and the distinction between the need to prove the existence of damages with reasonable certainty, which must be distinguished from a completely separate analysis of the amount of damages. Although expectation damages for breach of contract must be proven with reasonable certainty, and no recovery can be had for loss of profits which are determined to be uncertain contingent, conjectural, or speculative, it is also true that less certainty is required of the proof establishing the amount of damages.
As the Supreme Court explained: “The injured party need not establish the amount of damages with precise certainty where the wrong has been proven and injury established.” The trial court found that PharmAthene firmly established the fact of damages. The Supreme Court upheld the Court of Chancery’s statement of the law that where the proof of the fact of damages is certain, the “proof of the amount can be an estimate, uncertain or inexact.” See footnote 78.
Wrongdoer Rule: The court also explained the “wrongdoer rule” as it applies to breach of contract damages. The wrongdoer rule applies where the wrongdoer’s breach contributed to uncertainty over the amount of damages. Where the existence of damages is certain, and the only uncertainty relates to the amount, “the burden of uncertainty as to the amount of damages falls upon the wrongdoer.” See footnote 132. Moreover, the court may consider post-breach evidence when determining the reasonable expectation of the parties in connection with calculating damages, and may consider the willfulness of the breach.
In addition, where there is a willfulness involved in the breach, the court may take that into account in deciding whether to require a lesser degree of certainty. Also: “Damages need not be calculable with mathematical accuracy and are often at best approximate.” See footnote 138.
Dissent: The spirited dissent offers a scholarly contrary perspective but highlights of it will not be included in this short post as it does not currently represent the prevailing law in Delaware. Nonetheless, the heavily footnoted dissent remains worth reading for those interested in a fuller understanding of the issues and the law addressed in this case.