This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Picture a term sheet that everyone treats as a formality. Two companies sign it at the end of December. It says they will negotiate in good faith toward a definitive merger agreement, it sketches a consideration range in the tens of millions, and it says that while the definitive agreement is being papered, one side will sell the other an exclusive license to its technology. The buyer starts spending — diligence, integration work, and cash payments to the counterparty made on the strength of assurances that the license is coming. Four months later a letter arrives saying the counterparty has decided to look elsewhere and that, by the way, the term sheet expired back in January.
The Delaware Court of Chancery decided what that is worth on May 13, 2026, in Postbit, Inc. v. Look Dynamics, Inc., C.A. No. 2024-0566-KSJM. The answer is worth reading closely by anyone who has ever been told that a term sheet is non-binding and therefore does not matter.
Type II agreements are enforceable, but not the way people assume
Delaware sorts preliminary agreements into familiar categories. A Type I agreement is a complete agreement that the parties intend to memorialize in a more formal document later. A Type II agreement is one where the parties have agreed on certain major terms and bound themselves to negotiate in good faith toward a final agreement, without committing to the ultimate deal. The term sheet in Postbit was a Type II agreement, and the Chancellor said so in a January 2025 bench ruling that dismissed the request for specific performance.
The reasoning there is the part deal lawyers should internalize. Agreements to work and negotiate in good faith are enforceable — the court was explicit about that. What they will not support is an order compelling the deal, because faithful negotiation is an inherently qualitative exercise. The court invoked Chancellor Bouchard’s decision in Windsor I, LLC v. CWCapital Asset Management LLC and this court’s earlier PharmAthene decision, and observed that Type II agreements sit beyond what even Delaware’s enthusiastically contractarian law is willing to specifically enforce. A lock-out or exclusivity provision strengthens the good-faith negotiation covenant, but it is ultimately in aid of a promise that cannot be ordered into existence.
So the remedy is money. The question Postbit then answers is which kind of money, and the answer is less generous than the headline number in the term sheet would suggest.
Expectation damages were available in principle and unavailable in fact
Delaware law does not treat lost-deal damages as inherently speculative. In SIGA Technologies v. PharmAthene, the Delaware Supreme Court held that a breaching party cannot escape making the other side whole by arguing that expectation damages based on lost profits are speculative when the uncertainty is of the breaching party’s own making. The plaintiff must prove the fact of damages with reasonable certainty; the amount can be an estimate. Doubts about extent are generally resolved against the breaching party, and a court may require a lesser degree of certainty where the breach was willful.
That doctrine did not save the plaintiff in Postbit. The court had entered default judgment on liability after the defendant’s counsel withdrew and the defendant failed to obtain substitute counsel — entities cannot appear self-represented in Delaware courts. But default on liability does not hand a plaintiff its requested relief; the plaintiff still has to prove damages. On the record presented, the evidence of expectation damages consisted largely of the counterparty’s own promotional claims that its technology would “change the world,” internal models projecting rapid revenue growth, and the plaintiff’s belief that the merger was an extraordinary opportunity. The court found that insufficient to fix a precise amount, declined to reopen discovery so late in the case, and flagged its own concern about the inherently speculative task of awarding expectation damages for breach of a Type II agreement at all.
Read that last point carefully, because it is the doctrinal reality behind the PharmAthene headline. Expectation damages for a Type II breach are theoretically available, and a plaintiff with a real valuation record can get them. A plaintiff whose proof is the defendant’s marketing deck will not.
What the plaintiff actually recovered
Reliance damages carried the day. The plaintiff proved payments of $360,605.12 made to the counterparty in reliance on its commitment to execute the exclusive license and negotiate toward a definitive merger agreement, and the court awarded that amount in full, with pre- and post-judgment interest compounded quarterly.
The court also awarded attorneys’ fees on the basis of the defendant’s dilatory litigation conduct, and those fees — $394,225 through March 2026, with an instruction to update the affidavit through entry of judgment — exceeded the damages award itself. Costs of $4,821.31 went to the plaintiff as prevailing party.
Set that against a term sheet contemplating aggregate merger consideration in a range from $38 million to $65 million. The recovery was the out-of-pocket spend plus interest plus fees earned largely because the defendant behaved badly in litigation. Nobody should read this case as a template for monetizing a busted preliminary agreement. It is closer to the opposite: a demonstration that the realistic downside protection in a Type II term sheet is getting your money back, slowly, and only if you tracked what you spent.
The drafting consequences are concrete
There are four things worth changing in the way term sheets and letters of intent get papered, and none of them require heroics.
First, decide deliberately whether the document is Type I or Type II and then say so. Most term sheets say “non-binding except for confidentiality, exclusivity, and expenses” and then also include a good-faith negotiation covenant, which is a binding obligation the same sentence purports to disclaim. If the parties want a real negotiation obligation, write it as one and accept that it is enforceable in damages. If they do not, delete it — a bare agreement to agree, without the good-faith covenant and without agreement on major terms, is a much weaker hook. We have written separately on whether a Florida letter of intent binds, and the Florida analysis reaches a similar destination by a different route.
Second, if you intend to spend money before the definitive agreement, build the reliance record contemporaneously. The plaintiff in Postbit recovered because it could point to specific payments made on specific assurances. Advance payments, integration costs, third-party diligence invoices, and license fees paid ahead of documentation should be tracked in one place with the correspondence that induced them. That file is the recovery.
Third, if the upside matters, contract for it rather than hoping expectation damages will materialize. A break fee, a liquidated damages provision keyed to documented deal costs, or an agreed damages floor converts an inherently qualitative dispute into an arithmetic one. Delaware will enforce a reasonable liquidated damages clause, and a modest agreed number beats an unprovable large one. The same instinct drives what we have said about specific performance backstops after Crispo — the remedy you can actually obtain is more valuable than the remedy that sounds bigger.
Fourth, watch expiration dates, because the defendant’s letter here asserted that the term sheet had lapsed months earlier. Whether an expiration provision does the work a party thinks it does depends on the drafting and on what happened after the stated date, and it is a fight nobody wants to have retroactively. If the parties are still negotiating past the outside date, extend in writing. An exclusivity agreement with a clean, extendable term is easier to enforce than a term sheet whose life is contested.
The procedural sub-lesson for closely held counterparties
One more feature of this case is worth flagging for anyone negotiating with a small, thinly capitalized counterparty. The defendant lost on liability because its lawyers withdrew and it never replaced them, and Delaware does not permit an entity to appear pro se. That is a common failure mode for undercapitalized defendants, and it produces a default judgment that looks like a total victory and is not — the plaintiff still had to prove up damages, and could not prove the big number.
A counterparty that cannot fund a defense usually cannot fund a judgment either. Before a party spends real money in reliance on a preliminary agreement, someone should ask what the counterparty is actually good for, and whether the exposure should be secured — an escrowed deposit, a security interest in the technology being licensed, a guaranty from a principal. Those are unglamorous asks at the term sheet stage. They are also the difference between a paper judgment and a collected one.
The full letter opinion, which is eight pages and reads quickly, is available from the Delaware Court of Chancery opinion library. It belongs in the file of anyone who still describes a signed term sheet as “just a formality” — the obligation to negotiate in good faith is real, the remedy for breaching it is narrow, and the gap between those two facts is where deals go to die expensively.
If you are negotiating a term sheet or letter of intent and want the binding provisions, the reliance record, and the damages backstop structured before money starts moving, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
