Friday, April 7, 2023

Can They Back Out of the Deal?

Our favorite negotiation text
Dear Rich: I've been negotiating a license agreement with a company specializing in branding cleaning products for supermarket and box store chains. The negotiations have been going on for two months, and we've agreed on the basic terms, the royalties, and most of the "back-end" issues, but we're hung up on who owns the rights to improvements. The company is talking about canceling the deal. Can they legally back out at this point? 
Generally, the licensor can withdraw an offer at any time before you formally accept. Without rehashing law school principles of contracts, a court will enforce your licensing agreement when there is a legitimate offer, an unconditional acceptance, and mutual consent to all material conditions. Because material conditions – for example, who acquires rights to invention improvements -- are often negotiated right up until the day of signing, most licensing agreements are enforceable at the time of execution, that is when the agreements are signed. 
The parties may have signed off on a term sheet (or other document summarizing the material terms). That may bind them regardless of the intent to draft a more comprehensive licensing agreement later. However, we don't imagine you want to chase a potential licensee into court based on this contract theory. By the way, to avoid being bound by term sheets, napkin agreements, or email exchanges,  add a disclaimer to the effect of "This is not intended to be a binding legal agreement and does not impose any legal obligations." Unless the offer provides a time limit, it will be assumed to be open for a "reasonable" period, depending on the industry or trade.

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